Bill Clinton: Structural Unemployment

9/06/2012 05:30:00 PM
Dylan Matthews caught something I did not: in his speech last night, Bill Clinton claimed that much of our current unemployment is due to skills mismatch between workers and potential job openings. I'll let Matthews do the legwork on debunking the claim--suffice to say that the economic consensus is that skill mismatch accounts for less than 1% out of the current 8% unemployment, and is currently no higher than the levels of mismatch we had before the recession.

Of course, Clinton was really just repeating a popular refrain from his own presidency--we need more jobs training programs to help workers move into high-demand, high-paying jobs. I have little doubt that such a program would provide a boost to the economy, even though skill mismatch is not a significant source of the economy's current joblessness. The reason is that when we train workers to move from low-demand to high-demand sectors, we increase the productive capacity of the economy, and also spur investment in those high-demand industries as firms expand to accommodate the new workers.

Personally, I'm very skeptical that "skill mismatch" ever causes unemployment. The fact is that in an economy without sticky prices, wages will adjust within each industry so that supply of workers in each industry equals the demand for workers in each industry. Think about it this way: during the recession, demand for new houses collapsed, and a lot of construction workers become unemployed. However, if prices were completely flexible, then construction companies could choose a wage so low that it is still profitable to employ those construction workers (since they are reducing the wages, they can reduce the price they charge for the houses as well--at some price/wage low enough, there will be enough demand for houses to justify hiring back all those construction workers). Now, the construction workers may refuse to work for a wage that low, but in this case they are not technically unemployed because they aren't looking for work at the prevailing wage. The point here is this: structural change or "skill mismatch" leads to large disparities in wages across job types or industries, but not unemployment.

In conclusion, when people--including often economists--talk about unemployment due to "skill mismatch" they are really talking about something else entirely, such as sticky prices or search frictions.