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Qualitative Mismatches Michael Sattinger Presentation at AIAS Part of a research project with Ernest Berkhout, Jules Theeuwes and Maikel Volkering, to be published by SEO Economic Research and Randstad
Definition Qualitative mismatches arise when the qualifications of workers, individually or in the aggregate, are different from the qualifications required or specified for their jobs.
Direct Research • CEDEFOP (European Centre for the Development of Vocational Training) (2010). The Skill Matching Challenge: Analyzing Skill Mismatch and Policy Applications, Publications Office of the European Union: Luxembourg. • OECD (2011). Towards an OECD Skills Strategy. • OECD Employment Outlook 2011, Chapter 4. • European Expert Network on Economics of Education (2008). “Origins and Consequences of Changes in Labour Market Skill Needs,” analytical report for the European Commission written by Martin Schlotter with contributions by Giorgio Brunello, Stephen Machin, Daniel Münich and George Psacharopoulos. • National Research Council (2008). Research on Future Skill Demands: A Workshop Summary, Margaret Hilton, rapporteur.
Indirect Research • Increasing Inequality in U.S. • Technological and Organizational Change • Globalization • Job Polarization • Computerization
Objectives • Establish qualitative mismatches as a subdiscipline • Distinguish short run individual qualitative mismatches from long run aggregate mismatches • Demonstrate how qualitative mismatches arise from assignment with search and motivate search and matching models of unemployment • Propose policies to reduce qualitative mismatches
Causes of Short Run Mismatches • Extensive heterogeneity in workers and jobs • Assignment models determine how workers should optimally be assigned to jobs. • Imperfect information and costly search prevent optimal assignment, generating mismatches
Assignment with Search • Sattinger, 1995 • Coen Teulings and Peter Gautier, 2004: Costs of mismatch are equal in magnitude to costs of unemployment. • Teulings and Gautier, 2011: Mismatches caused by search frictions cause 7 to 15.6% loss in output.
Overeducation • Richard Freeman, “The Overeducated American” • Gregory Duncan and Saul Hoffman, 1981 • Joop Hartog, 2000 • Wim Groot and Henriëtte Maassen van den Brink, 2000 • Edwin Leuven and Hessel Oosterbeek, 2011: On average, 30% overeducation, 26% undereducation. Return for required education .089, overeducation .043, undereducation -.036. • Conclusion: No causal interpretation
Business Cycle Mismatches Narayana Kocherlakota, 2010: “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. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.”
Business Cycle Mismatches, Continued • Peter Diamond (2011) argues against the conclusion that structural mismatches are generating a higher level of unemployment that would not be affected by aggregate demand policies. He cites evidence that most of the shift in the unemployment-vacancy relation in the current recession arises from fewer hires instead of mismatches. • Richard Layard, Stephen Nickell and Richard Jackman (1991): Index of mismatches. • Ayşegűl Şahin, Joseph Song, Giorgio Topa and Giovanni L. Violante, 2011: Compare observed pattern of unemployment with optimal allocation. • These models abstract from explicit mismatches.
Consequences of Short Run Mismatches • Workers: overqualification on entry, wage losses, job satisfaction, job training, job search and mobility, promotion within firms, skill obsolescence, decline in cognitive abilities. • Firms: productivity depends positively on the proportion overeducated and negatively on the proportion undereducated (François Rycx, 2010) . Impacts come from the younger workers.
Long Run Aggregate Qualitative Mismatches • Current debate on causes of increasing inequality in U.S. • Growth of office jobs in the early twentieth century (Goldin and Katz, 2008, p. 172). • As a result of 19th century transportation development in the United States, large quantities of grain were exported to Europe, depressing prices of grain. • Rapid technological change in the last two decades of the nineteenth century. (Derry and Williams, 1960).
Possible causes of demand shifts • Capital-Skill Complementarity (Griliches, 1969; Krusell, Ohanian, Ríos-Rull, and Violante, 2000). • Skill-Biased Technological Change (Acemoglu, 2002). • Computerization (Autor, Levy and Murnane, 2003). • Globalization. Offshoring (Blinder, 2009). • Skill-Biased Organizational Change (Milgrom and Roberts, 1990, Lindbeck and Snower, 1996, Caroli and Van Reenen, 2001).
Evidence of supply shifts Goldin and Katz (2008): From 1970, rapid slowdown in accumulation of human capital. 1900-1975: schooling increased .82 years per decade. 1975-1989: negligible increase. 1989-1999: one-half year.
Observation and measurement: Relative Wages Source: Goldin and Katz, 2008, p. 290 Problem: Why did supplies fail to increase?
Measurement Based on Overeducation Source: Jean-François Giret (2007)
Measurement based on income shares • Manacorda and Petrongolo (1999) assume Cobb-Douglas production function with skilled and unskilled labor. Technological change alters exponents and income shares. SBTC if proportional change in skilled input share is greater than proportional change in employment. • Shifts against the unskilled in Britain, France and Germany • No shifts in Italy • Shifts against the skilled in the Netherlands • In the U.S., substantial shift in favor of skilled labor in the 1980’s, supporting Goldin and Katz conclusion.
Consequences of long run qualitative mismatches • Changes in wage differentials, inequality • Job polarization (Goos, Manning and Salomons, 2011; Autor and Dorn, 2010; Michaels, Natraj and Van Reenen, 2010) • Restricted firm expansion and economic growth. Bennett and McGuinness, 2009: skill shortages limit productivity of firms.
Present values of educational reforms Source: Hanushek and Woessmann, 2010
Statements of future jobs and skill needs • Autor, Levy and Murnane, 2003: Non-routine jobs that would not be performed by computers • Blinder, 2009: Jobs requiring face-to-face interactions • Caroli and Van Reenen, 2001: Workplaces with decentralized authority, flatter managerial hierarchy, and increased multi-tasking • Levy, 2010: Foundational skills including numeracy and literacy, advanced problem-solving skills, and advanced communication skills • Murnane, 2008: Interpersonal skills including written communication skills, knowing how to work well with various people cultures, and knowing how to give and receive advice • National Research Council, 2010: Adaptability, complex communication/social skills, non-routine problem solving, self-management/self-development, and systems thinking.
Open Questions in Short Run Qualitative Mismatches • Can the job search model be extended to explain when seekers accept jobs with qualitative mismatches? • What is the recruitment strategy for firms facing workers with qualitative mismatches? • What is the basis for wage differences observed in the overeducation literature? • Is there a Natural Rate of Mismatch? • How do qualitative mismatches affect job-to-job transitions? • Do skills and training substitute for education? • How are institutional features of the labor market related to levels of qualitative mismatches?
Open Questions in Business Cycle Qualitative Mismatches • Do overeducation and undereducation, or over-qualification and under-qualification, change over the business cycle? • How do mismatches affect the rate of change of wages? • Can a search and matching model with explicit qualitative mismatches explain shifts in the Beveridge Curve?
Open Questions in Long Run Qualitative Mismatches • Why didn’t numbers of high school and college graduates in the U.S. increase more in response to increasing educational premiums? • How does a long run qualitative mismatch affect the requirements for a particular job? • How do short run, business cycle, and long run qualitative mismatches combine to determine mismatches observed at the individual worker-job level? • Do potential long run qualitative mismatches impose a limit on growth and returns to educational reforms?