New evidence on the relationship between skills and labor supply
More than a decade after the financial crisis of 2008, median household incomes have stagnated at their pre-2008 levels, and global economic growth is expected to decline further from what is already a historic low. While the unemployment rate has rebounded, part time, service, and temporary work remain the principal drivers behind labor market growth. Weak recovery from the crisis has been widely attributed to the “skills gap”; commentators and policymakers alike hold that quality jobs are there, but Americans are simply not qualified to perform them.
At the American Economic Association’s most recent conference, ALICIA SASSER MODESTINO, DANIEL SHOAG, and JOSHUA BALLANCE provide evidence against this view. Using a proprietary database of more than 36 million online job postings, they show that employers increased skill requirements in states and occupations which experienced larger increases in the unemployment rate. Their findings suggest that it wasn’t a shortage of skills which weakened labor markets, but rather the ubiquity of qualified applicants which drove employers to raise hiring standards. By testing employer responses to an influx of veterans from Iraq and Afghanistan, the authors are able to confirm this mechanism:
"As a source of exogenous variation in the availability of skilled workers, we make use of a natural experiment resulting from the large increase in the post-9/11 veteran labor force following troop withdrawals from Iraq and Afghanistan... Panel A of Table 5 demonstrates that there is a strong, significant, and positive relationship between the sharp increase in the supply of returning veterans and the rise in employer skill requirements for both education and experience."
This is among the first pieces of empirical evidence which suggests that employer skill requirements are driven, in part, by labor supply. Link to the conference webpage, where a full version of the paper is available for download.
- As early as 2011, Lawrence Mishel argued against analysts who asserted that the unemployment crisis was structural, proposing instead that the economy was experiencing a crisis of demand. Link.
- In his most recent book, LSE anthropologist David Graeber examines the relationship between skill and value, questioning why jobs which produce the most social value tend to be categorized as unskilled, consequently earning lower wages. Link to Graeber's widely acclaimed essay from 2013 that first outlined his argument, and link to the Google preview of his new book.
- In a report for the Roosevelt Institute, Marshall Steinbaum and Julie Margetta Morgan argue that the 'skills gap' narrative is inconsistent with student debt crisis: "Although the country’s populace is becoming more educated, each educational group is becoming less well paid." Link.
- Paul Osterman wrote an accessible overview of the debate for The Atlantic in 2014: “The claim that a shortage of skilled workers has exacerbated inequality has gained traction but it is not supported by the data… For instance, while 38 percent of manufacturing firms require math beyond simple addition, subtraction, and multiplication, the type of math employees need to be able to handle are standard features of a good high school education and part of the curriculum for most community-college students…Nearly 65 percent of businesses report they have no vacancies whatsoever, and another 76.3 percent report they have no long-term vacancies…” Link.
New Researchers: TRUST EXCHANGE
Studying the political determinants of economic exchange
In his job market paper, ABHIT BHANDARI—a political science Ph.D. candidate at COLUMBIA UNIVERSITY—examines the relationship between political institutions and market exchange. To research the work, Bhandari incorporated a business in Senegal and hired employees to conduct door-to-door sales.
From the abstract:
"Economic growth requires confidence in the secure exchange of goods. But when states selectively enforce rule of law, political considerations can moderate the trust that buyers have in sellers. How do political connections moderate economic behavior in developing countries, and how do such connections operate alongside formal state institutions? I propose a theory of seller moral hazard in exchange, where buyers believe that politically connected sellers can break deals with relative impunity. In this context, state-backed formal contracts may only protect the claims of connected buyers who similarly receive preferential treatment from the state.
These findings demonstrate the importance of unequal political connections in impeding trade, and the limits of piecemeal legal solutions. Exchange under such conditions can result in distinct trading networks that intensify inequalities."
Link to the paper, link to Bhandari's website. Link also to a post at Ken Opalo's blog, where we first saw this paper. Opalo situates Bhandari's work alongside Yuen Yuen Ang's excellent book on Chinese institutional history (which we've linked to in the past), noting that "A common mistake made by most would-be reformers is the total disregard for forms of organization that make business transactions credible in the 'informal' sector in the name of imposing a state-centric rule-based systems."
Each week we highlight great work from a graduate student, postdoc, or early-career professor. Have you read any excellent research recently that you'd like to see shared here? Send it our way: email@example.com
- An important new initiative, Economists for Inclusive Prosperity, published its first report: a series of 10 policy proposals indicating how we can reform key economic institutions to foster a more equal society. "Our claim is that there are overarching themes and commonalities that taken together provide a coherent overall vision for economic policy that stands as a genuine alternative to the market fundamentalism that is too often (and in our view, wrongly) associated with mainstream economics. We strive for a whole that is greater than the sum of the parts." Link.
- A new paper from the Economic Policy Institute argues that labor’s share of income remains inadequate despite recent recent wage growth: "Another striking feature of our measure of the labor share is how depressed it remains even as we approach 10 years from the end of the Great Recession. This highlights that even wage growth significantly faster than we’ve seen in recent months can persist for a long time before it necessarily translates into inflation breaching the Fed’s 2 percent target." Link.
- An essay by Brett Scott argues for understanding the transition to cashless payments as a "process setting in motion a 'cleansing' of informality." Link.
- "Focusing on the adoption of electricity in the concrete industry during the 1930s for its unique source of variation and data availability, [I find] that firms adjusted to this labor-saving technology by decreasing employment rather than increasing output." Miguel Morin from the Institute for New Economic Thinking questions the link between wages and productivity by considering the impact of electricity adoption on wages during the Great Depression. Link.
- Sandeep Vaheesan of the Open Markets Institute explores the history and "hidden power" of the FTC for battling market concentration. Link.
- New at NBER: Alberto Alesina, Elie Murard, and Hillel Rapoport examine how immigration patterns affect preferences for redistribution in Western Europe. Link.
- "The MOOC pivot" by Justin Reich and José A. Ruipérez-Valiente. Link.
- "Upon reading a selection of the grievance books ("cahiers de doléances") proffered to King Louis XVI in 1789 by the various regions and estates of France, Alexis de Tocqueville reflected with horror that 'what they were asking for was the simultaneous and systematic abolition of all the laws and customs in force throughout the country.' Given that he couldn’t read all 60,000 books, however, to what extent is Tocqueville’s conclusion simply the result of a selection bias?" A paper by Jeff Jacobs subjects the grievance books to fully-automated content analysis. Link.