Unemployment Is a Labor Market Mismatch (Jobs exist, but firms are unable to find the right skills)

RCM ^ | 05/30/2012 | By Aparna Mathur



After an unexpected upswing at the beginning of this year, the labor market appears to be back in the doldrums again. The month-on-month employment increases of 200,000-240,000 workers in December, January and February created a sense of optimism in the minds of many economists, including this one, that the economic recovery had finally seeped through to the labor market. The subsequent drop in the employment numbers to slightly more than 100,000 has left us scrambling for an explanation.

In the absence of policy changes and initiatives, the most obvious explanation for the observed volatility in the jobs numbers is that the labor market is responding primarily to short-term stimulus, in the form of seasonal changes in demand and better weather conditions. These are hardly likely to spur the economy towards a sustained long-term recovery. So what are the best policy prescriptions for these times?
Identifying the problem is the first step. As traditional economic theory suggests, hiring is ultimately a matching game. 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.
What is needed for the employment numbers to rise is not only job or vacancy creation, but also an adequate supply of workers that the firm views as good, productive matches for the jobs created. This idea is neatly summarized in a theoretical construct titled the Beveridge Curve, after the economist William Henry Beveridge.
The Beveridge Curve shows the relationship between the jobs vacancy rate and the unemployment rate. The curve typically slopes downward since higher unemployment would be associated with fewer vacancies. However, if the curve moves outwards, away from the origin, this would suggest that a given level of vacancies is associated with a higher level of unemployment. This implies a less efficient labor market caused by mismatches between available jobs and the unemployed.
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