Education, Skill Sets and Recovery

The Federal Reserve Bank of Cleveland has an interesting article in the recent issue of Economic Trends (see page 14). The author asks whether a mismatch between worker skills and job skills may be a factor in the slow job creation growth.

On the surface, this is a logical question. Recessions are often seen as a time for factors of production to be reallocated. This applies to labor. Certainly, as companies retrench they will look to increase productivity among existing workers before bringing on new ones. Indeed, one lesson we teach is that rising prices increase supply, partially because higher prices allow less productive resources to come into the process. Workers with weaker skill sets may, indeed, face a period where their skills don't match demand.

But I'm not sure I agree with one aspect of the article's conclusion. The author talks about lower productivity and higher unemployment. I would think that the retrenchment would lead to higher productivity. To that point I would point at the long-term trend, as illustrated here by Mark Perry on Carpe Diem. Mark's data is longer-term. And granted, the past does not guarantee the future, but I think it would be logical to expect increased productivity from the existing workforce, at least in the near-term. If there is a skills mismatch, growth will have to come from higher productivity. And that increase in productivity may change the larger economic landscape, establishing a higher premium for certain skills, while those with lesser skills could face an uncertain job market. Recent productivity data would be helpful in this respect.

This brings me to a post by Greg Mankiw. Greg asks whether the current average duration of unemployment may indicate the Non-Accelerating Inflation Rate of Unemployment (referred to as NAIRU or "the natural rate of unemployment" by some) may be increasing. If the economic structure has fundamentally changed, say by requiring more skilled and more productive workers, one could see how this would be possible. However, as has been pointed out here and in other places, the duration of unemployment could be a result, in part, of extended unemployment benefits providing a skewed incentive. I'm not sure I totally buy that explanation, but I do understand it. I think Greg is right in saying we may not have the answer to the question for some time.

To summarize this post, I don't know whether we are undergoing a major structural reorganization of the economy. A skill mismatch would certainly contribute to that, and changing productivity would certainly be expected in such a circumstance. If these issues are tied together, it would indicate a need for a different approach to economic policy than what is being tried. But I find all three links interesting and worth your time. I certainly welcome comments.