Evidence on the mismatch theory

17/08/2012 § 4 Comments

On an earlier post showing a Beveridge curve for New Zealand, commenter detmackey helpfully noted that the RBNZ had a presentation earlier in the year on the topic. I didn’t get further details, but searching led me to this econometrics study group meeting, which included papers on unemployment.

Francesco Furlanettoy and Nicolas Groshennyz have investigated ‘Mismatch shocks and the natural rate of unemployment’ using a DSGE model. I don’t know the technique, so I can’t address any technical issues about accuracy or robustness. However, they are very clear about their findings:

In our model, mismatch shocks do not account for the surge in unemployment and the evolution of the Beveridge curve that we have observed during the Great Recession. Instead, we find that the unemployment rate rose in 2008 because of a lack of aggregate demand caused by large, adverse risk-premium shocks and investment-speci…c technology shocks. Since then, the unemployment rate has remained stubbornly high mainly due to downward nominal rigidities, captured by bargaining power shocks in our model.

They are working with US data, so we shouldn’t assume that the results necessarily hold for New Zealand. However, it isn’t clear to me that the mismatch explanation is strong enough to explain the rise in unemployment. Mismatch is saying that current workers with their current skills aren’t the droids employers are looking for. Employers want some other set of skills, and their requirements have shifted so much that 2% or more of employees are now obsolete.

Let’s think about skills. The standard distinction is between ‘hard’ and ‘soft’ skills. Hard skills are the specific, technical things you need to know; I need to know how to draw and interpret downward-sloping demand curves. Soft skills are all the behavioural things that make someone a better or worse employee: showing up to work on time, working diligently, getting stuff done, playing nicely with others. Generally, soft skills are more portable than hard skills, and also more important for getting and keeping a job.

The mismatch explanation hinges on hard skills having depreciated so much for 2% or more of the labour force that the more important soft skills don’t make up for the loss. I find that hard to believe, especially because I tend to think that soft skills depreciate less quickly than hard skills.

Back to the Furlanettoy and Groshennyz paper. What particularly amused me is how they actually point the finger in a way you don’t often see in academic research. They begin by laying out the problem — is it mismatch or not? But, they don’t just say ‘some researchers suggest’ and put a bunch of citations in brackets. No, here’s what they say:

Members of the Federal Open Market Committee disagree on why is unemployment so high and on whether the recent evolution of the unemployment rate is compatible with the Federal Reserve.s dual goal of price stability and maximum sustainable employment. Kocherlakota has advocated that the rise in the unemployment rate was driven by an increase in the degree of mismatch between vacant jobs and unemployed workers.

They go on to provide a long quote from Kocherlakota, which includes this:

What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch – geography, skills, demography – and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem.

The authors make it very clear that, in fact, they find that mismatch is not the explanation: ‘mismatch shocks do not account for the surge in unemployment and the evolution of the Beveridge curve’.

This raises the obvious question: could the Fed maybe do something to help cure the problem, after all?

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