Explaining the Openings-Hiring Gap

by Reihan Salam

Peter Orszag assesses three different theories as to why a substantial gap has opened up between job openings and hiring:

These possible explanations for the openings-hiring gap have substantially different implications. The mismatch theory, which seems the least plausible of the three, is the most depressing, because it implies we’re in for more painful adjustment and sluggish job growth. The Krueger theory suggests that as companies adjust their wage offers to an improving labor market, the gap will narrow. And the notion that internal hiring and recruiting intensity explain things implies that the gap itself is a bit of a mirage.

The Krueger theory is particularly intriguing, and it is in a sense related to the mismatch theory:

Alan Krueger, a labor economist at Princeton University who recently stepped down as chairman of President Barack Obama’s Council of Economic Advisers, believes this to be an important piece of the puzzle. He argues that the unemployment rate for those just recently out of work has now returned to roughly pre-crisis levels, and that people who have been out of the labor force for an extended period are exerting little downward pressure on wage rates. This combination means that, although the long-term unemployed still face a tough road ahead because they are essentially on the margins of the labor market, pressure is growing for higher wages for everyone else.

Under this view, companies have simply not yet adjusted their wage offers. Some support for this perspective comes from experimental data in the jobs survey, which show that the job-offer rate has risen most sharply (relative to hiring) for establishments with 10 to 250 workers. Such small businesses may have more trouble than larger ones in assessing the broader labor market. [Emphasis added]

The implicit suggestion is the long-term employed are not so eager to return to the labor force that they are willing to accept low wages, possibly because their skills and networks have deteriorated over time, thus making the prospect of returning to work appear daunting. Orszag is skeptical about the mismatch theory:

Such a structural mismatch may well explain part of the gap, yet it seems unlikely that it explains most of it. After all, job openings in the retail trade have doubled over the past three years, while hiring has been flat. Is it plausible that we lack qualified workers for these jobs?

But the skills such jobs require include noncognitive skills, and it could be that these skills erode relatively quickly.