Qualitative Mismatches

Qualitative Mismatches

Michael SattingerPresentation 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

Short Run vs. Long RunShort Run Long run

Causes Costs of searching by worker or firm prevent best matches

Unbalanced shifts in supply and demand

Methods of analysis Study how workers search for jobs and how firms recruit workers

Examine consequences of trends in technological and organizational change, globalization, ICT, education

Methods of observation and measurement

Differences in individual job and worker characteristics

Forecasts of aggregate differences in supply and demand for labor categories

Consequences Costly search for workers and firms, lost wages, lower firm output

Lost returns to worker investments, inadequate labor force

Policies that address mismatches

Labor institutions that encourage more efficient matches, reduced search costs

Adapt educational policies to anticipated changes

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

Dictionary of Occupational Title Categories and ActivitiesData People Things0 Synthesizing 0 Mentoring 0 Setting Up

1 Coordinating 1 Negotiating 1 Precision Working

2 Analyzing 2 Instructing 2 Operating-Controlling

3 Compiling 3 Supervising 3 Driving-Operating

4 Computing 4 Diverting 4 Manipulating

5 Copying 5 Persuading 5 Tending

6 Comparing 6 Speaking-Signaling 6 Feeding-Offbearing

7 Serving 7 Handling

8 Taking Instructions-Helping

Comparison of Worker and Job Characteristics

Data People Things

Worker Qualification

4 6 3

Job Requirement

6 4 3

Matching Outcome

Over-qualified

Under-qualified

Exactly matched

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 MismatchesNarayana 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).

Wage increase when demand shifts more than supply

40 50 60 70 80Labor

2

4

6

8

10

Wage

D1

D2S1 S2

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?

Mismatches at individual level; Hartog, 2000Country, period, measurement method

Overeducation Undereducation

Netherlands, 1960-1977, job analysis

Up from 7% to 26% Down from 36% to 21%

Netherlands, 1974-1995, worker self-assessment

Up from 17% to 24% Down from 30% to 12%

Spain, 1985-1990, worker self-assessment

Up from 17% to 28% Down from 23% to 11%

Portugal, 1985-1992, job analysis

Up from 26% to 33% Down from 43% to 38%

United States, 1969-1977, worker self-assessment

Down from 35% to 32% Not available

Measurement Based on Overeducation

0,0

10,0

20,0

30,0

40,0

50,0

60,0

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

CAP / BEP BAC Supérieur court Supérieur long Ensemble

Années de sortie du système éducatif

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

Description Present Value of Change for EU Countries Through 2090

Scenario I Raise performance on PISA tests by 25 points, or ¼ standard deviation

€32 trillion

Scenario II Bring each country up to PISA level for Finland

€87 trillion

Scenario III Reduce percentage of low achievers to less than 15% by 2020 (EU benchmark)

€21 trillion

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 Mismatches1. Can the job search model be extended to explain when

seekers accept jobs with qualitative mismatches?2. What is the recruitment strategy for firms facing

workers with qualitative mismatches?3. What is the basis for wage differences observed in the

overeducation literature?4. Is there a Natural Rate of Mismatch?5. How do qualitative mismatches affect job-to-job

transitions?6. Do skills and training substitute for education?7. How are institutional features of the labor market

related to levels of qualitative mismatches?

Open Questions in Business Cycle Qualitative Mismatches

1. Do overeducation and undereducation, or over-qualification and under-qualification, change over the business cycle?

2. How do mismatches affect the rate of change of wages?

3. Can a search and matching model with explicit qualitative mismatches explain shifts in the Beveridge Curve?

Open Questions in Long Run Qualitative Mismatches

1. Why didn’t numbers of high school and college graduates in the U.S. increase more in response to increasing educational premiums?

2. How does a long run qualitative mismatch affect the requirements for a particular job?

3. How do short run, business cycle, and long run qualitative mismatches combine to determine mismatches observed at the individual worker-job level?

4. Do potential long run qualitative mismatches impose a limit on growth and returns to educational reforms?