Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Tuesday, January 24, 2012

Using Beveridge curve dynamics to identify cyclical and structural shocks

I recently gave a short presentation to the Board of Directors of the Louisville branch of the St. Louis Fed. Following my presentation (which stimulated a lively discussion), I had the opportunity to listen to each member report on local economic conditions from different parts of Kentucky. Two themes stood out. The first was how "an air of uncertainty" along a variety of dimensions had "frozen" investment plans (with the apparent exception of younger entrepreneurs, who probably do not know any better-jk). The second was the unfilled demand for highly skilled, specialized workers (primarily in manufacturing).

I want to focus on the second theme here. In some sense, it is really amazing that firms are struggling to find qualified workers in an era of 8% unemployment. The Financial Times recently ran a piece on the subject: Skills Gap Hobbles US Employers, and I have to say that Mr. Greenblatt below would have fit right in at my BOD meeting:
Drew Greenblatt has been looking for more than a year for three sheet-metal set-up operators to work day, night or weekend shifts. 
The president of Marlin Steel Wire Products, a company in Baltimore with 30 employees, Mr. Greenblatt says his inability to find qualified workers is hampering his business' growth. "If I could fill those positions, I could raise our annual revenues from $5m to $7m," he says.  
He is offering a salary of more than $80,000 with overtime, including health and pension benefits. Yet in spite of extensive advertising,  he has had no qualified applicants. He is trying to train some of his unskilled staff but says none has the ability or the drive to complete the training. 
This quote identifies two problems. The first is what economists call "skills mismatch" caused by a "structural" shock. The second, that some workers are unwilling and/or unable to upgrade their skills is another matter that deserves attention, but is something that I will leave aside here. 
Apart from anecdotal evidence, how does one go about measuring "skills mismatch caused by structural shock?" One idea, initially proposed by Abraham and Katz (JPE, 1986), is to use the comovement to in vacancy and unemployment rates to identify "cyclical" and "structural" shocks. 

I put those terms in quotes because there are no set definitions for them. I like to think of a cyclical shock as an event that makes it more or less profitable to find the same kind of worker for the same kind of job. And I like to think of a structural shock as an event that makes it more or less profitable to find a different kind of worker for a different kind of job. 

Anyway, the Abraham and Katz idea is that one would expect cyclical shocks to trace out a stable, negatively-sloped Beveridge curve. That is, one would expect the job-vacancy rate and the unemployment rate to move in opposite directions.  A structural shock, by contrast, is expected to move vacancy and unemployment rates in the same direction. The idea here is that it is now more difficult to find the right kind of worker, so that even greater levels of recruiting intensity is likely to be associated with higher unemployment rates. 

The FT article cited above uses this idea in the diagram to the right (together with the results of a Kaufman poll of entrepreneurs) to suggest that the high U.S. unemployment rate is primarily the consequence of "structural" factors. 

Here is what the U.S. Beveridge curve looks like from May 2005 - November 2011 (The vacancy rate is computed from the Conference Board's help-wanted-online data, which is available from 2005 only).

As the HWOL measure of job vacancies is available at the city level, Constanza Liborio and I thought it might be interesting to see how job availability varies across major U.S. metropolitan areas and how job vacancy rates correlate with regional unemployment rates before and after the beginning of the most recent recession.

Specifically, the exercise we perform is as follows. Consider a major U.S. metropolitan area. Compute the average job vacancy rate and unemployment rate for this metropolitan area over the prerecession period May 2005 – November 2007. Recalculate these averages since the beginning of the last recession, December 2007 – November 2011. Next, compute the change in the vacancy rate and unemployment rate across these periods. Perform this exercise for a set of the largest metropolitan areas in the U.S. 

The results are displayed in the following figure.

Not surprisingly, we see that the unemployment rate in all these metropolitan areas went up since the recession began.  However, the same is not true of job vacancy rates (that is, not all vacancy rates went down, as one might have expected). Specifically, while we observe the typical Beveridge curve dynamic in many jurisdictions (suggesting that cyclical factors are dominant), we also observe vacancy rates remaining relatively stable, or even rising, in several others (suggesting that structural factors are dominant). 

So the tentative conclusion here is that the relative importance of cyclical vs. structural factors appears to vary across regions. To the extent that monetary policy is an effective stabilization tool, it cannot be expected to impact all regions of the country equally. In many regions, localized fiscal policies (education and training subsidies, etc.) may prove to be a more direct and effective tool.
Related story:
More Workers Moving for Out-of-State Jobs


  1. I'm not surprised by this at all. People I know have been bitching for years about the lack of skilled labor (middle skilled, they call it). I think I even posted an article from the WSJ on here a long time ago about it.

    I'll take it a step further though. I think it's a result of problems in the k-12 education system that are at the root of the whole thing. Is it possible, in your data, to go back farther in time and look at the evolution of the skill gap in some way? Sort see when it started to materialize?

    1. The view I got from one of the Louisville BODs was that historically, a lot of the skills were acquired by workers through the apprenticeship programs offered by the larger manufacturers (many of whom have now pulled out of the region, leaving the burden to underfunded technical schools, etc.)

    2. I didn't think of that, but that makes sense. That's an interesting research program for someone.

    3. a lot of the skills were acquired by workers through the apprenticeship programs offered by the larger manufacturers (many of whom have now pulled out of the region

      This report of yet another negative second order effect of free trade obviously pleased you a great deal

    4. JLD,

      I'm not sure you know what pleases me. But you might like to know that the reports we are receiving recently from many parts of the country tell us that manufacturing is coming back to the US ("insourcing"). This is evidently due, in part, the the rapidly rising wage costs in China and other parts of the world.

    5. you know what pleases me

      being a lawyer, it is easy for me to grasp the concept that people intend the natural consequences of the policies they advocate. Thus, I know that all the adverse consequences of free trade please you (there are no demonstrated advantages---all the studies show that increased social costs, such as crime, family violence, despair, school faiures, more than offset any gains in temporary lower prices)

      since you support free trade, it naturally follows that you support the second order effect of a lack of skilled workers here, which only makes a bad situation worse

  2. "...a lot of the skills were acquired by workers through the apprenticeship programs offered by the larger manufacturers (many of whom have now pulled out of the region, leaving the burden to underfunded technical schools, etc."

    In other words, formerly, the skills were acquired by employees, paid by employers who found those skills valuable. Today, however, the employees themselves must pay to learn those skills.

    I think that is correct, and I think it says something important about what has changed in our economy.

    1. Well, that's not quite right. Evidently, workers would also pay for their training in the form of lower wages during their apprenticeship. Way back in history, I think that apprentices even earned negative wages.

  3. Doc at the Radar StationJanuary 25, 2012 at 5:17 AM

    Bingo! Training is minimal on the job nowadays. I've worked in manufacturing for 30+ years and it's terrible. They've gotten excessively lean and are too dependent on trade schools to do the job. They can't-they can only give somebody a generalized skill set that is helpful, but an apprenticeship (OJT, whatever) could do it in half the time and do it better. The job descriptions and needs are also often way too narrow (also reflecting a lack of commitment to train by the employer).

    A lot of newer, smaller manufacturers are often located in an atomized manner and have a lot to do with local/state/county tax breaks. Many have found they are located too far away from the skilled potential hires are. Also, the last 10+ years whole industries have vacated the US and there are few people around to pass on their knowledge. In short, the passing on of knowledge needs to happen at the job itself, not in the classroom.

  4. Have read numerous articles about this skills mismatch. For example, factory workers increasingly need to be able to run complex machinery with a fairly high level of math required. Has anyone ever considered the connection between immigration policy and the skills mismatch??

    1. Not sure, but good question. What is your source for the "high math skills increasingly needed to run complex machinery"? I'm sure this is true, but just wondering if it widespread.

  5. reading through the posts, so far, what struck me were three propositions

    First, the "entitlement" and "dependency" mentality of business. Addolfatto and those who he abets---the Very Serious People and the 1%---constantly tell us that social safety nets are bad because they lead to entitlement and dependency. Who has it worse? Business or the unemployed?

    Second, the defensiveness of our Bourbons, like Andolfatto. We get red herrings like this statement, constantly: "reports we are receiving recently from many parts of the country tell us that manufacturing is coming"

    The truth is that, if manufacturing is coming back, it will be 150 years before we recover the jobs lost in the last 10.

    Third, the lack of intellectual honesty on the part of our academics. We are constantly told that people react to incentives, but when it hurts this rule is quickly forgotten.

    If workers don't have skills doesn't it naturally follow that such is a result of their being no meaningful reward for having skills? What is the reward for getting an engineering degree, if visa workers will take the same job at 1/3 the pay?

    Let's assume that Ben Franklin did pay for his apprenticeship and this is relevant.

    If so, it is far to ask, Who was more opptomistic about his future? Ben Franklin or 99% of Americans today?

    Franklin feared only bad health. Opportunity (in the form of unlimited land) was probably viewed as unlimited. He feared no foreign power because GB ruled the waves.

    Today, the 99% in the USA face a world of no opportunity. The 1% have seized control of the gov't to extract every last drop of wealth from everyone else. The familiar tools up---public education, great public universities, unions---are under attack day and night. Here in Missouri we have basically defunded the University of Missouri, whose budget is lower than it was 15 years ago.

    I could go on but the blogger is a Bourbon, so what is the point?

  6. I'm suspicious of the example given. For one thing, Marlin Steel Wire Products is no longer advertising for those three positions, at least no on their web site. For another, he REALLY can't find anyone to train??? I'm going out on a limb here, but I think an ad on Monster like this would get lots of applicants:

    Wanted, highly motivated individual with experience in the sheet metal industry needed. Specific experience as a set-up operator not required; training will be provided. Salary after satisfactory completion of training and achievement of a journeyman level of competence will be $80,000 plus benefits.


    1. Yes, I'm sure that an ad on Monster would get a lot of applicants. I don't think he was denying a large set of applicants. The problem is applicants with the appropriate training, or willingness and ability to complete the necessary training.

      I suppose what he says might not be true, but then, why would you ascribe such motives to this person? I don't see why he would not be telling truth, and I hear the same story from many other employers.

  7. The problem is applicants with the appropriate training, or willingness and ability to complete the necessary training

    David, let's use your assumption, that people are rational economic actors. The only conclusion that can be drawn is that the alleged comp and benes are not sufficient and assured enough to warrant the investment.

    IOW you have just identified uncertainty on the part of workers as the cause of their refusal to invest. IOW we need to remove labor market uncertainies, rather than focus on business uncertainty.

    IOW we need: (1) universal health care; (2) non recourse student loans; (3) no foreign visas; and (4) stopping free trade and the exporting of jobs, just for starters.

    If you say are problems are labor skill shortages and you assume labor is rationale, then you need to come on over to the super progressive camp and start appearing on the The Ed Show

    1. JLD,

      So is your claim that people prefer the "certainty" of being unemployed, as opposed to the "uncertainty" in employing their time investing in human capital?

      I am not going to take a stand on "universal" health care. But as for non-recourse student loans, the supply of credit is likely to contract if they are non-recourse, so you would need government loans (de facto transfers, because they will default -- if they didn't, you wouldn't need the non recourse stipulation).

      As for (3) and (4), I find it morally repugnant that a nation of immigrants and invaders should now want to stop others from realizing their dreams in a land of opportunity.

      You are an immoral person for wanting to discriminate against the less fortunate not blessed with US citizenship.

    2. "You are an immoral person for wanting to discriminate against the less fortunate not blessed with US citizenship."

      The nature of political boundaries is that one discriminates against people outside those boundaries.

      Unless you are against political boundaries -- an anarchist? -- one must be for some type of discrimination.

      Now we are just haggling over the price.

    3. That's not very Christian of you, Chris. You are an evil regression runner!

  8. David,

    This article - - might be of interest. In fact, it might be of interest to others who have posted comments, too.

  9. DA,

    In defense of JLD, you are not an American and lack a fundamental understanding of American history. You certainly are in no position to judge our morality for us, especially given your own selfish reasons for suggesting that someone who doesn't want you here is immoral. You are the one who is immoral.

    I think first priority for your job should for the qualified son or daughter of an American service man or woman, especially of a family who made a real sacrifice. Giving a gov't job to an immigrant creates all the wrong kind of incentives.

    If you need opportunity, stay at home and make them for yourself. Americans have no debt to you. They have paid the World's debts for a century.

    It means nothing to you, for example, to walk the Boone Gap or the Trace or Civil War battle fields in Tenn., Ark, MO, or LA., or TEX., or Kings Mountain, or to consider what it was like to be with Washington at Braddock's retreat, or numerous battlefields in the South Pacific and Phillipines and Korea.

    All those white markers aren't your blood kin or their brothers in arm and your "argument," omits all those souls and their sacrifice.

    Properly viewed, arguing for immigration to a free, mature country like the United States is nothing more or different than arguing for Socialism or Communisium: it is an argument for freeriding, wanting to personally profit from the sacrifices of others, leaving behind others at home who have to pay the real sacrifice while the immigrant has the good life made possible by the sacrifice of others.

    Today, the most selfish people on the earth are immigrants to the U.S. They should stay at home and practice being run over by tanks until they get it right.

    That's why you are here. To avoid doing the hard work of creating opportunity in your own country.

    1. Anonymous,

      I wasn't judging by my moral code. I was judging by the moral code of Jesus (held widely by Americans themselves). Jesus taught us "To love your neighbor as yourself." Matthew 22:36-40.

      You are not making me feel very loved here!

  10. DA

    If you loved your neighbors you wouldn't dodge the question on universal health care and you would be a strident voice for putting people here to work, now. Sorry, but I have never seen one word of passion from you about any of the mess, except you become as shrill as possible if creditors might, might I say, face inflation.

    Instead, you are perfectly happen for millions of Americans to be without work and you spend all your time, idle and otherwise, blaming them with tripe like 1 factory couldn't find 3 machinists.

    My neighbors live across the street from me, not half way round the world.

  11. Skill mismatch problem north of the border:

    You are not allowed reply unless you're Canadian. Doing so would be immoral and show a lack of understanding of Canadian history. ;)

    Anon212 (who also posted the Atlantic link). Sorry I forgot to use a handle last time.

  12. I think, part of the problem with interpreting the graph with the Beveridge curve is that the data comes from ConfBoard, which is much less reliable, I think, than the data from JOLTS (presented in the first graph). If you plot JOLTS data you don't get this wiggle. The data from ConfBoard recently showed that vacancies fell in July-Aug 2011 by a huge amount, which in the end they admitted was a feature of ConfBoard removing just 3 online boards from their index (these became aggregators rather than posters of original ads). This example simply illustrates how the methodology of ConfBoard keeps evolving, and why a curve based on such data will be unstable.

  13. metropolitan areas and how job vacancy rates correlate with regional unemployment rates before and after the beginning of the most recent recession. China Direct