The Agenda

Are There Really Only Two Theories at Work?

Mike Konczal writes:

Why is unemployment so bad in this recession? There are two theories at work. The first is a story of aggregate demand. The second theory is one of a mismatch in skills.

Mike proceeds to argue that aggregate demand is a big deal, and that is undoubtedly true. But is it possible that the unemployment story is about aggregate demand and a mismatch in skills? Mike and I have both been exercised by the rise in underemployment and the large number of workers who’ve left the workforce in recent years. Yet male labor force participation has been trending downwards for decades, and this is true across the OECD. 

As the OECD observed in a 2003 report, over twenty percent of Sweden’s 20-64 population is registered as disabled. Some of this might reflect the Swedish love of various risky winter sports, and some of it is presumably an artifact of generous disability benefits and skills mismatch. 

If skills mismatch has indeed been a problem since long before the Great Stagnation, why worry about it now? One hypothesis is that the housing sector employed large numbers of men who’ve seen their labor market position deteriorate, but of course the decline in employment levels has extended well beyond the housing and construction sectors. So there goes that theory. Another possibility is that less-skilled workers have been shed across a wide range of sectors while skilled workers have seen their employment levels decline by far less. This has more than a grain of truth to it.

By focusing on underemployment, Mike and Arjun Jayadev effectively illustrate the depth of the demand problem:

 

We focus on studying unemployment by only looking at the employed for two reasons. The first is that this removes the “skill” story from the picture; these employees have the skills necessary to work the first hour of their job but there just isn’t enough demand to work the 35th hour of their job. It is a curious firm that can hire someone whose skills allow them to work the 10th, 20th or 30th hour of a job profitably but not the 35th hour.

The second is that it also removes any potential work disincentives created by unemployment insurance. The debate about the effects of unemployment insurance on the unemployed is a very controversial one. Some have claimed that the increase in unemployment is largely a result of extending unemployment insurance. Others have argued that the negative effects of unemployment insurance have been largely overstated and that unemployment benefits provide a very effective form of stimulus spending. This debate is not relevant to those working part-time for economic reasons.

What we need to know, however, is whether there are meaningful differences between those who remain attached to the workforce and those who are leaving the workforce in large numbers. It could be that while a disproportionately large share of the underemployed are less-skilled, like a disproportionately large share of workers leaving the workforce, these have intangible assets — cultural capital (e.g., they belong to ethnic affiliation networks that facilitate job searches, etc.) and non-cognitive skills — that their counterparts lack. 

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