While it would be lovely to believe that everyone is well matched to their role and no skill goes to waste, the reality is that the labor market is riddled with the poor allocation of skills. Research from Boston College, Pompeu Fabra, and Erasmus explores how the relative levels of skills mismatching vary according to the business cycle.
With the world in the midst of a recession, the researchers examined how labor markets reallocate talent via creating and destroying vacancies and via the formation of relationships at work and the changing of jobs and careers.
Often it’s argued that recessions can help “cleanse” the market by destroying unproductive jobs and reallocating resources to more useful roles. A kind of creative destruction on an individual level. Other economists believe that recessions instead have a sullying effect whereby job searching becomes fundamentally more disorganized and movement slows down further down the ladder. This in turn makes the recession worse.
Understanding friction
In order to effectively design policies to try and stabilize economic fluctuations, the researchers believe that it’s vital to understand the various frictions that underpin the reallocation of talent in the labor market, and the role business cycles play in that process.
To do this, the researchers developed a model that has two key features, the first of which shows that workers differ according to various skill dimensions and that workers tend to try and sort themselves into careers with a diverse array of requirements along these dimensions.
The second factor then assumes that both workers and employers have incomplete information. Indeed, firms often only learn about the skills workers have after they’re hired and put to use. As a result, switching skills can entail learning about previously untried skills.
“We find that aggregate mismatch is procyclical among job stayers and countercyclical among new hires, with the former force being overall dominating,” the researchers explain. “These patterns are consistent with direct evidence on the cyclicality of mismatch.”
Behavior during a recession
When the economy is stable, workers can not only move up and down the ladder within a career path but also move across career paths. During recessions, however, it’s common for underqualified workers to be fired, and especially if they’re on the lowest rungs of the job ladder.
This reduces mismatches and performs a cleansing function. These workers often attempt to get back on their feet by switching career, which the authors believe results in higher levels of mismatching when they’re hired towards the bottom of a new career ladder. Therefore, there is also a sullying aspect at play.
As a result, recessions see a considerable amount of job movement in and out of the bottom rungs of a career, which when combined with the career mobility of workers results in mismatching of skills with jobs. What’s more, the researchers argue that while both cleansing and sullying effects are present, it’s usually the cleansing effect that dominates.
Scars left behind
This has a significant impact on those involved, in what the researchers refer to as the “scarring effect of unemployment”, as the earnings losses that result from job losses are both considerable and persistent.
“We have also shown that the model predicts a scarring effect of job displacement that is sufficiently large to account for empirical evidence on the unemployment scar,” the researchers conclude.
As a result, those who lose their jobs during a recession often suffer the consequences even after they’re re-hired again, because there is considerable uncertainty when trying to rebuild a career in a new domain, which inevitably slows down one’s progression up the career ladder.
