Skillz

So there is a new paper out by Paul Beaudry, David Green, and Benjamin Sand attempting to explain the difficulty in finding skilled work that college graduates have increasingly been experiencing over the last decade. The authors developed a model of skill-biased technological change, in which they extended a standard model to include a dynamic adjustment process, which they found could create a boom-and-bust cycle in demand for cognitive tasks (skilled labor).

The paper is pretty technical, but the Daily Beast has a decent summary: the key idea is that skilled laborers create “organizational capacity” that is slow to depreciate—in essence, it takes more skilled labor to develop a product (or capacity) than it takes to maintain that product or capacity (it takes many software and electrical engineers to make a robot, but far fewer to maintain it once it has been built)—this can lead to a boom while the organizational capacity is being developed by skilled laborers, and then a bust when those laborers are no longer needed (as the organizational capacity depreciates very slowly so maintaining it is not labor intensive).

The authors posit that this boom-bust cycle could explain the increase in the number of skilled workers between 1980 and 2000, and, more importantly, the decline in the employment ratios for skilled workers between 2000 and 2010. While I think that this is an interesting model, I find it incredibly difficult to believe that this model is the driving force behind employment trends over the last 10 years.

I think there are two other factors at play here that the authors (inexplicably in my opinion) fail to mention. The first is demographic trends—looking at the graph below (images weren’t working for some reason), it is obvious that the ratio of high school graduates to college graduates in the workforce has declined over the last 10 years. However, the authors fail to mention that we should expect some decline in this ratio over time, as the share of the population with a college degree has been steadily rising over time. (As the total share of the workforce with a college degree rises, it makes sense that the ratio of high school graduates to college graduates in the workforce would drop).

Second, as is obvious in both the above graph and the graph below, when measuring employment trends between 2000 and 2010, the dot-com recession and, in particular, the 2008 recession are overwhelmingly driving employment trends during this period. It is certainly true that ‘skilled workers’ are having more and more difficulty finding skilled jobs, and that ‘unskilled workers’ are being driven from the workforce. This is not, however, because the number of skilled jobs has shrunk, but it is because the total number of jobs (across all fields) has shrunk. These employment trends aren’t being driven by a shrinking demand for skilled workers; they have been caused by economy-wide swings in demand stemming from exogenous shocks (like a stock/housing bubble bursting). That’s why we saw unemployment rise across a broad spectrum of occupations in 2008 (as opposed to being concentrated in a few, skill-driven occupations). It also explains why unskilled workers are leaving the workforce—faced with fewer total unskilled positions in the labor market, and increasing competition from skilled laborers (that cannot find skilled jobs because of the decline in skilled jobs from the recession), it has simply become too competitive for some unskilled workers to find employment under current labor market conditions.

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