Explaining Southern California's economy

Is a 'labor mismatch' making the jobs crisis worse?

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Job seekers wait in line to enter the San Francisco Hire Event job fair in San Francisco. They could be in the wrong place.

Just in time for last week's terrible jobs report from the Labor Department (150,000 new jobs expected, a mere 69,000 new jobs added, and that's U-G-L-Y), American Enterprise Institute resident scholar and economist Aparna Mathur wrote a piece about the bad numbers, arguing that they may not be something that we can easily blame on sluggish job creation:

Every month when the Bureau of Labor Statistics reports the unemployment rate, the underlying assumption in the minds of most consumers of the report, is that firms created fewer jobs and therefore hiring was low. Less well understood is the idea that while the jobs exist, firms may be unable to find workers to fill those positions.

I called Mathur to explore this idea a bit more deeply. Bear in mind that AEI, based in Washington, D.C., is generally regarded as a conservative think tank. Their resident scholars will tend to stress market-based solutions, rather than relying on government to extract us from problems. 

With that understanding, Mathur is on to something. The American left may not want to hear it, but it's unclear that their solutions are going to lead us out of the labor darkness (for what it's worth, it may not be possible for either side to make the crisis go away). 

The conventional wisdom, according to Mathur, is that jobs are hard to come by because there's a lack of demand for workers by companies ("firms," in the parlance of economists). "However, when you look at the data and map it to the unemployment numbers, including the U6 number, you find that there are 6 people for every vacancy," Mathur said. ("U6" is the unemployment statistic that captures part-time and temporary workers, while "U3" is the more familiar headline stat.)

"There are jobs being created," Mathur continued. "But people aren't being matched at the rate we would like to see."

Being a good AEI resident scholar, Mathur isn't just highlighting this problem. She's got some policy recommendations, at least one of which is politically controversial, particularly for residents of high-unemployment states like California (10.9 U3 unemployment, with U6 much worse).

"If you can understand the mismatch, you can target policies to address the problem," she said. 

Such as...extended unemployment insurance. This is one aspect of the so-called "fiscal cliff" that the U.S. might fall off. It's the smallest, at $26 billion, of a host of looming challenges. But for the long-term unemployed, it's a big deal. 

Mathur suggests that it wouldn't be worst thing if we fall off that one cliff.

"Why do we have policies that are subsidizing the long-term unemployed?" she asked. "It could be contributing to the labor-mismatch problem."

Or, as she wrote:

If people have been unemployed for a long period, then firms are more reluctant to hire them as they have a negative perception about their skills and human capital. The current recession has seen an unprecedented increase in the rate of long-term unemployment. More than 42 percent of the unemployed have been out of work for 27 weeks or longer. Prolonged unemployment may be a self-reinforcing problem, as longer unemployment spells — driven in part by more generous unemployment insurance — make workers less likely to find new jobs.

"A solution would be to cut back on generous extended unemployment insurance," she said. "I know the government is doing it to help people. But it provides a perverse incentive to not accept jobs that people don't want."

Desperate times call for unpopular measures. "We're at a crisis state," she said. "It's better to find a part-time job," even if that job comes with a reduced wage. "That's more likely to sustain demand and spending. There are huge benefits."

Not everyone (obviously) agrees. The "progressive" (code for "lefty," but not old-school New Deal lefty) Center for American Progress, for example:

The evidence is conclusive. Unemployment insurance is a critical social protection program that funnels key investment dollars into our economy while simultaneously helping to keep millions of American jobseekers from slipping into poverty. With so many Americans out of work, we need these benefits to continue.

To Mathur's credit, she's not talking about pushing the long-term unemployed over the fiscal cliff. Rather, she thinks the money could be diverted to hiring programs at the state level.

Firms could receive a subsidy to take on a worker for six months. The worker receives training, and after six months, if the firm decides it's going well, the subsidy would end. This type of training subsidy might be a better use of funds than extending unemployment benefits."

Why? Because of the labor-mismatch problem. "It's a positive thing you're doing, matching worker to a job," she said. "It has a better chance of succeeding. Firms are reluctant to take on workers because it's such a big commitment. A subsidy would allow both the worker and the firm to have some flexibility."

There's something else driving the labor-mismatch issue, also related to federal efforts to fight the financial crisis: mortgage modifications. So in addition to worsening the mismatch problem by paying workers to not work, the government is undermining labor mobility, traditionally a strength of the U.S. job market, by trying to keep people from defaulting on bad home loans. 

They keep their homes, but they don't go to where the jobs are. They're no longer underwater on the mortgage, but they're underwater in the workplace. In California, disproportionately affected by the housing crisis, this is something that has to be taken into account, especially in the wake of the mortgage settlement led by California Attorney General Kamala Harris. We don't want to lose residents to other states. But we don't want to retain unemployed people either, if they can find work elsewhere.

Mathur thinks these two factors contributing to the labor-mismatch problem are actually preventing us from adding 3.7 million jobs. That's a serious number, in a country with 12.7 million people out of work. Serious enough that Mathur's analysis should be taken...seriously.

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