There was an interesting piece of analysis presented on the US Economic Policy Institute (EPI) site a few weeks ago – Labor Market Weakness Is Still not due to Workers Lacking the Right Skills – which showed the “the number of unemployed workers and the number of job openings by industry” as a means of evaluating the nature of the job cycle in the US. The conservatives, who want to build arguments against any fiscal activism, try to explain the massive and persistent unemployment in the US and elsewhere in terms of structural constraints including skill shortages and mismatches. The EPI analysis showed that “unemployed workers dramatically outnumber job openings across the board” and in the individual industries. The conclusion – “the main problem in the labor market is a broad-based lack of demand for workers”. I had been working on a similar story myself since the latest Job Openings and Labor Turnover Survey (JOLTS) data came out on October 7, 2014. Here is what I found, which is a little different to the EPI outcomes but similar and doesn’t alter the facts.



I have dealt with this issue before (in 2011) in this blog – The skill shortage ruse is re-appearing.

It is one of those recurring themes of those who eschew government involvement in the labour market other than to legislate against worker entitlements etc. The old ruse – skill shortages are killing the economy therefore we need more imported workers and less income support to force workers to upgrade their skills etc.

There was an influential article earlier this year (January 5, 2014) in the Politico Magazine – Closing the Skills Gap – written by the CEO of JP Morgan and the CEO of Jobs for the Future.

They claimed that:

Today, nearly 11 million Americans are unemployed. Yet, at the same time, 4 million jobs sit unfilled. This is the “skills gap”—the gulf between the skills job seekers currently have and the skills employers need to fill their open positions.

They described the skills shortage as a “large and growing issue”.

Note that in any labour market there will always be flux – jobs being created and opening and others being destroyed. And, workers moving between jobs. That is why full employment does not mean zero unemployment nor zero job vacancies.

Please read my blogs – Age of firm rather than size matters for job creation in the US and Industry job dynamics in Australia – for more discussion on the technical issues relating to this.

However, in a healthy labour market, one would expect the vacancies to be in excess of the pool of unemployed. This state imparts dynamic efficiency because the firms have to be continually offering training with every job slot to ensure the scarce labour can fit into their production process.

So the fact that there were 4 million job openings in the US earlier this year (4.2 million to be exact) but 9.9 million workers unemployed does not suggest their are skill shortages. The 4.2 million job openings in a labour force of more than 155 million amounts to 2.58 per cent – which might easily be considered a full employment number of job openings. It is certainly not a large figure by any stretch.

The problem is that the evidence doesn’t support the conclusion that the jobs mismatch (jobs in areas where unemployed do not have the skills) theory.

The overwhelming evidence is that there are experienced workers out there who have acquired skills in particular industries who are now unemployed because the level of aggregate spending cannot support sufficient economic activity to employ their skills.

Being a time series person predominantly (my statistics background is time series econometrics) I was more interested in the history of the job openings and unemployed by industry data, rather than just looking at the current situation as the EPI had done.

The following graph shows the time series for the All Industries Job Shortage measure (in thousands of jobs). It is computed as the difference between the total Job Openings in each industry less the experienced unemployment workers attached to that industry.

The Job Openings and Labor Turnover Survey (JOLTS) – data is available from the US Bureau of Labor Statistics from December 2000 and the most recent data takes us to August 2014. To get the matching labour force data from the Current Population Survey you have to dig deep into the BLS archives and find the relevant codes. This is a pain but once you have done it a few times you learn to save codes in text files and that makes it a bit quicker. But still a pain.

In the first graph, there are two major points to note.

First, the two big cycles since the early 2000s are clearly evident. The first, being associated with the Bush recession and a subsequent recovery, and then the big plunge as a result of the GFC.

The scale of the demand side devastation to the US labour market in 2008 and 2009 is amazing – there were more than 12 million workers across all their previous industries in excess of the available jobs.

I have noted this before but when you see time series change very quickly and sharply it is hard to explain those shifts with structural explanations, which typically cause underlying trend shifts. Of course, a major weather or geological event can cause massive shifts in time series fairly abruptly, but whether the minimum wage or unemployment benefit is a bit high or a bit low will not do it.

Further, there were no structural shifts that I am aware of to explain the behaviour of this data in 2008.

It is all down to a major shortage of spending spread across the industry structure reinforced by multiplier effects (as workers in one sector lost their jobs their spending cuts impacted on other sectors and the losses reverberated across all industries.

Second, throughout the whole decade or more (2000 to 2014), there has never been a state where there have been enough job openings for those experienced workers who are unemployed. The US labour market has not be close to full employment.

The next graph shows the situation as at August 2014 for all the major industries (including total). At present only two industries appear to have more jobs than unemployed workers associated with them – Financial Activities (which includes Finance, Insurance, Real Estate) and Public Administration.

The next graph – which is very long (but the only quick way to show all the detail) shows the time series history for all the major industries.

Every industry fell off the cliff in 2008 as the GFC hit. Some were closer to matching the job openings with the experienced unemployed workers in their industries.

So Mining et al, Education, Professional and Business Services were close. As expected FIRE, Information Services had more openings than unemployed in the period before the crisis.

Industries such as Construction, Manufacturing, Leisure and Hospitality were in excess labour supply situations – more unemployed than job openings.

The GFC clearly devastated the US labour market in all industries. That is another reason to ditch the structural and skills shortage argument. The impact was relatively uniform across the industry structure, a characteristic of a major aggregate spending failure.

The recovery (such as it has been ) has also been relatively uniform. It is interesting that FIRE is now one of the two sectors that has more job openings than unemployed.

That is a reflection of the underlying values of the system, which I would argue caused the crisis in the first place. The lessons are yet to be learned it would seem.

There is more scope for the Government to be aggressive in its hiring to ensure that more people transfer from the private sector to the public sector and take up the excess positions.

Structural mismatch has two components – skill and space (location). The data presented does not preclude the possibility of spatial mismatch.

That is, that even though there are vastly more experienced manufacturing workers who are unemployed than their are manufacturing job openings it could be that all the jobs are available on the East Coast and the unemployed workers are living on the West coast (a stylised extreme).

I have the data on region but it will take some time to match it all up.

My brief excursion with it last week is that the job shortages are so big in the US at present that it is highly unlikely that there is significant spatial mismatch – some but not a dominating factor.

Conclusion

The data tells me that the US was hit with a massive spending failure and the labour market dynamics show that there are still major job shortages spread relatively broadly across the industry structure.

The time series dynamics shown are not consistent with structural failures (such as a perverting impact of minimum wages, for example) nor of the skill shortage ruse. There is a vast surfeit of experienced workers in each industry relative to the current job openings.

It has been that way for a long time and only increased aggregate spending will alter that.

If the private sector will not lead the way, then there is one other sector that has the means and the responsibility to do so.

The public deficit in the US is clearly still too low and progressives who, of late, have been cheering its decline with gloats such as “We told you the deficit would fall once growth emerged” are right but wrong in feeling good about a declining fiscal deficit.

That is enough for today!

(c) Copyright 2014 BIll Mitchell. All Rights Reserved.