US Unemployment: A Skills Mismatch or a Cyclical Disruption?

Before you can fix something, it’s good to know exactly what the problem is. The persistently high US unemployment rate is one of those problems that has defied an exact description. There are those who believe that continuing high unemployment is the result of a skills mismatch, where displaced workers don’t have the skills needed to fit into new employment possibilities. Analysts at some big banks have championed this view.

Against that reading of the data is the view taken by Federal Reserve chairman Ben Bernanke and many others that what we are seeing is a cyclical disruption that will correct itself once the economy is back on a firm footing.

New research from the New York Federal Reserve Bank appears to indicate that the US suffers from a combination of the two types of unemployment, with the cyclical theory getting most of the blame:

[O]ur counterfactual analysis indicates that mismatch unemployment at the 2-digit industry level can account for 0.75 percentage points out of the 5.4 percentage point total increase in the U.S. unemployment rate from 2006 to October 2009. At the 3-digit occupation level, the contribution of mismatch unemployment rises just beyond one and a half percentage points. When we compute occupational mismatch separately for different education groups, we find its contribution to the observed increase in the unemployment rate is almost twice as large for college graduates than for high-school dropouts.

Prior to the Great Recession, the US unemployment rate was 4.6%. It climbed to 10% in October 2009 before falling to 8% in January. A 1.5% contribution from a skills mismatch would indicate that we should be seeing an unemployment rate now of around 6.8% instead of 8.3%. According to the NY Fed the conclusion is:

If mismatch only accounts for a portion of the persistently high unemployment rate, what are the other economic forces at work? … Weak aggregate demand combined with wage rigidity (Shimer, 2012), uncertainty about future productivity (Schaal, 2012) and future economic policy (Baker, Bloom, and Davis, 2011), or selective restructuring by firms during recessions (Berger, 2012) do, qualitatively, imply a slow recovery in job creation.

The NY Fed’s study is available here.

Paul Ausick