Saturday, July 28, 2012

Skills Shortage? US Evidence (II)

"The problem with the labor market isn't that the unemployed aren't looking for work -- it's that employers aren't looking very hard for workers." Mike Konczal (See here)
In the previous post, I reported on research by Faberman and Mazumder (Chicago Fed) on the empirical evidence in support of the best-known search model. It is this model that justify the diagnostics of voluntary unemployment and/or labour skills shortage.

FM, two neoclassical economists, cautiously report "mixed evidence" in support of these models. Other observers, apparently less favourably disposed towards neoclassical economics, put it more bluntly: "Not, really".

Regardless, in my opinion, by far the most telling evidence against these models comes from two other figures, included in MF's paper.

Here I'll examine these two figures.


Figure 2 (reproduced from FM's paper) depicts the Sahin-Song-Topa-Violante (SSTV) [*] mismatch index (a numerical proxy measure for "the degree of mismatch in the labour market").

This is how FM evaluate this time series' behaviour:
"It shows that mismatch rose sharply during the recession, but it has since abated. Other research shows similarly mixed evidence on mismatch".
And this is how SSTV conclude the paper [1] presenting their index:
"How much did mismatch contribute to the dynamics of U.S. unemployment around the Great Recession? (...) Plausible parameterizations of the model imply that mismatch can explain at most 1/3 of the recent rise in the U.S. unemployment rate (...) as an upper bound".
Why is this significant to the "job snob"/"technological change" interpretation of the Beveridge curve?

In FM's words: "Search theory implies that outward shifts in the Beveridge curve are the result of a decline in matching efficiency and, consequently, a rise in mismatch". But is not just that skills mismatch cannot currently be an important cause of unemployment in the US, as "it has since abated" (according to FM), it probably never was the main cause of it, in the first place (according to SSTV).

Or, hopefully in simpler and more direct terms, the Beveridge curve shifted to the northeast, but this shift may have had little if anything to do with matching efficiency.

So much for the "job snob"/"technological change" interpretation.


Let's move on to Figure 3, focusing on two curves: the job-filling rate (darker blue) and recruiting intensity index (black). The name given to the first variable, it seems to me, is descriptive enough. The second one, the recruiting intensity index, is "shorthand for the other instruments employers use to influence the pace of new hires - e.g., advertising expenditures, screening methods, hiring standards, and the attractiveness of compensation packages" [2].

FM describe their behaviour in these terms:

"They [Davis, Faberman and Haltwinger, 2] find that employers were able to fill jobs relatively easily during the recession, but their measure of recruiting intensity per vacancy, which captures a variety of efforts employers put into recruiting, remained low well after the end of the recession."
I don't think there is much more to add to this description. If there were, the opening quote does it much better than anything I could come up with.

So, why is this important? FM put it this way: "One can interpret this as employers imposing relatively high hiring standards despite the abundance of available workers". I can think of another equivalent way: if US employers pay less money for more skills/experience, they are actually cutting US wages.


After considering separately the pieces constituting the FM paper, let's try to assemble back the whole.

As I see it, the paper's central message is that, in the US case:
  1. voluntary unemployment or technological changes cannot explain that 3 years after the Great Recession finished, employment by education levels have not fully recovered;
  2. voluntary unemployment or technological changes cannot explain that labour demand, as assessed by online job openings ads, is decreasing (both points considered in the previous post);
  3. voluntary unemployment or technological changes cannot explain that jobs mismatch as measured by the SSTV index is currently at pre-Great Recession levels; 
  4. instead, there is evidence that the current slow job recovery is based on employers imposing "relatively high hiring standards".
  5. "relatively high hiring standards" is another way of saying "cutting wages".
With this, I close my exposition of the Faberman and Mazumder paper. Not only the traditional "job snob"/"technological change" explanation has been challenged, but Capelli's opposing explanation receives empirical support (points 4 and 5 above).

One step remains. I still need to explain why the two views differ. This is what I will attempt to do in my last post on the American evidence.


Congratulations to Faberman and Mazumder!

[1] Ayseg├╝l Sahin, Joseph Song, Giorgio Topa, and Gianluca Violante. 2011. "Measuring mismatch in the U.S. labor market". Federal Reserve Bank of New York, working paper, revised October. Accessed 20-07-2012.
[2] Steven J. Davis, R. Jason Faberman, and John C. Haltiwanger. 2012. "Recruiting intensity during and after the Great Recession: National and industry evidence" American Economic Review: Papers and Proceedings, Vol. 102, No. 3, May, pp. 584-588. Working paper versions available online.

[*] Perhaps it is convenient to add that Sahin works at the New York Fed. As FM, she and her co-authors seem to be neoclassical economists and otherwise favourable to search theory.

Image Credits:
All charts come from Faberman's and Mazumder's excellent paper.

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