Skills Mishmash

There are two competing memes or narratives about the slump's low levels of employment. As Mike Konczal at Rortybomb blogs (via Krugman), "The first is a story of aggregate demand. The second theory is one of a mismatch in skills."

Dean Baker blogs:

Actually, the statistics do not show that the number of job openings is anywhere close to the number of unemployed workers. The most recent data show the number of openings at just over 3 million, a bit more than 1 opening for every 5 unemployed workers. This is still down by more than one-third from pre-recession levels.

It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment. This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers. There is no major sector of the economy that fits this description.

Commenting on Konczal, Krugman blogs:

So how would you decide between these theories? The answer is to look at the evidence -- specifically, to ask whether what we see bears the "signature" of one story or the other. The aggregate demand story suggests that we should see depressed employment in all industries, that we should see workers of every skill type facing a poor job market. The mishmash mismatch story says that we should see surpluses of labor in some places, but shortages in others.

And Mike shows that the data overwhelmingly fit the demand story, not the mismatch story; Every single major industry has seen a rise in involuntary part-time work; so has every major occupation. There’s no hint that any major kind of labor, in any sector, is in short supply.
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The evidence, then, is overwhelmingly in favor of a demand story. But the mismatch people don’t want to hear that -- and they have substantial influence. And so the slump goes on.

"Fiscal Gridlock"

Baker was commenting on a New York Times story by Sewell Chan which gave space to Minnesota Fed President Kocherlakota, a leading proponent of the skills mismatch argument. Chan reports he said:

"We are unabashed technocrats, seeking to solve an unabashedly technical problem: how do we manage monetary policy so as to ensure lower unemployment and maintain inflation at an appropriate rate?" he said. Disagreements, he added, "ultimately stem from different assessments of the complicated economic situation and not from political differences"

I disagree with Kocherlakota. It's very political.* Elsewhere in the article Chan writes:

Although the Fed considers that danger [of deflation] remote, it is worried because inflation is running at only about half the desired level of about 2 percent, while unemployment stands at 9.6 percent. 

The committee’s Aug. 10 meeting was dominated by a vigorous discussion over the decision to reinvest the mortgage-related bond proceeds -- an approach Mr. Bernanke favored. The meeting on Tuesday will probably be used to assess actions the committee might take at its meetings on Nov. 2 and 3 and Dec. 14. 

...

Continued "fiscal gridlock" -- an inability to reach agreement on how to handle the impending expiration of the Bush-era tax cuts -- would put pressure on the Fed to act, Mr. Berner added. A second round of quantitative easing could lower the yield on the benchmark 10-year Treasury note to 2 percent, from its current level of about 2.75 percent, he estimated.

Laurence H. Meyer, an economic forecaster and former Fed governor, said additional quantitative easing would have a meaningful effect on the economy but would not be a "game changer." 

The Fed could announce that it was buying an additional $2 trillion in securities -- nearly doubling its $2.3 trillion balance sheet, which is already two and a half times where it stood before the financial crisis in 2008. Or it could take a more incremental approach, by buying a modest amount of securities and leaving the door open for more. 

Mr. Meyer estimated that the "shock-and-awe option" would raise economic growth 0.3 percentage point in 2011 and 0.4 percentage point in 2012, but that unemployment would remain high: 9.2 percent at the end of 2011 and 7.7 percent by the end of 2012. 

...

"For me, the ball is in the fiscal court for now," Mr. Fisher [President of Dallas Fed] said. "Any further action by the Fed must be subject to the kind of rigorous cost-benefit analysis that Ben Bernanke cited in Jackson Hole."

The fiscal court ain't doing nothing. There's "fiscal gridlock." It's not the Fed's fault, but it's the case. So, Mr. Fisher is in fact making a political argument. We shouldn't do anything about the low employment levels caused by the bursting of the housing bubble. We should allow the American middle class to be destroyed. Because why? Fisher doesn't say but it's most certainly a political decision and not a technical one.  The economic evidence is there on what needs to be done. Inflation is at one percent and 9 percent unemployment through 2011? Does Fisher really know what the costs of that is?

Perhaps the political legitimacy of the Fed?
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* A good rule of thumb: if the argument relies on accurate data, it's technical. If it ignores all evidence and data: it's political.