Wednesday, February 27, 2013

On the Skills Gap in the US Labor Markets

This interview (via Balloon Juice)  gives quite a bit of food for thought about what might be happening in American labor markets.  It steps past the usual assumptions of the god-from-the-machine economics where the markets are just assumed to be competitive and where all participants are assumed to have perfect information about everything.

But in reality someone hiring a worker has very little real knowledge about that worker's skills.  There's always a risk in hiring someone, because that person might turn out not to be sufficiently skilled, whatever the original paperwork and interviews might suggest.

The interview (with Peter Cappelli) is about something slightly different, viz. the idea that firms no longer want to do much on-the-job-training.  I'm not sure what the data shows about this, but Cappelli's basic ideas are intuitively appealing:

He argues that the so-called skills gap in the United States (between what workers can do and what firms need them to do) is nowhere near as large as it is touted to be.  Rather, firms in the past hired people and then trained them for the job.  Now they want the workers to come ready-trained.

That would explain the recent trend of firms refusing to even look at those applicants who are unemployed.  Perhaps their skills have already rusted? 

Though an alternative explanation works, too:  The labor markets are still the buyers' markets so firms can be as picky as they wish.

And that alternative explanation also accounts for the reduced willingness on the firms' behalf to train workers.  Why bother doing that if you can find people who are already trained at the same wage rate?

But hold your horses.  There's something else going on, because if those well-trained people are willing to work at fairly low wages, why can't firms find them?

And then we know that employers are basically not paying very much, so if you are the least bit economically oriented, then you say ‘ok, they can’t find what they want, but they’re not willing to raise their prices (wages in this case) so gee, that’s not a surprise.’ 

Cappelli proposes that firms are artificially narrowing the supply of labor they consider so that only those who are a perfect fit need apply.  But that narrow segment of the market will not take the jobs at the low wages the firms are offering.  Hence the paradox of a buyers' labor market where the buyers cannot find what they search for.

I'm not sure what's going on here within the usual framework of a labor market.  It could be that the markets are not clearing.  It could be that the particular market Cappelli has in mind has few large firms buying the labor, and those firms have market power to set wages and to restrict employment.  Or it could be that the ordinary market framework fails to explain the kind of limited rationality that underlies employment decisions.