Human Capital and Structural Adjustment

A common theme in the blogosphere is distinguishing between demand-driven and skill-mismatch unemployment. Typically, those who think that the recession is caused by inadequate aggregate demand adopt the former and reject the latter, whereas those who argue that the recession is characterized by structural readjustment emphasize the latter. I usually have attempted to make the case that it could be both, since demand for labor may be limited at a certain level of production (high nominal wages relative to what wages would be if everyone were employed). This doesn’t mean I support demand-stimulating programs, rather I see both as two sides to the same phenomenon. But, my real quest is to figure out which theory has the most explanatory power for the given set of data (I’m really a “multi-causal” kind of guy) — the current recession and recovery.

The skills mismatch theory isn’t irrelevant, even if give other changes it may become irrelevant (e.g. an employer might include training if wages fall or revenue rises), and there is some evidence that it plays a limited role in explaining current levels of unemployment. What brings me to write this short post on the subject is a recent tweet by ‘TheBubbleBubble,’ who writes,

How to do we recover from our econ crisis? Well, I have many ideas and I think we should start by improving our human capital.

There’s a lot of ways this can be interpreted, and I think the most dangerous way is to assume that we can “[improve] our human capital” through State-funded programs. We shouldn’t make improving human capital a policy prescription, instead we ought to leave the decision to the individual. In fact, a significant cause of skill mismatch may have been the drive in the past, at least, 50–70 years to increase human capital through subsidized higher education.

There is a lot of evidence that some firms can’t find qualified employees. Earlier this week, I linked to an article in the Wall Street Journal arguing that some 600,000 jobs in manufacturing were left unfilled in 2011. Here in San Diego, I was made aware of a firm, which produces machine parts, offering free classes in its trade to lure potential employees — wages are relatively high too: I heard up to $80,000, but I’m sure there’s a range (with most new employees making much less). In this kind of environment (San Diego, specifically, has an unemployment rate of 9.2-percent) these kinds of offers seem ridiculous, but it reflects on real structural problems (workers with superfluous skills).

But, these kinds of offers may not seem that attractive when you can go to a subsidized university for as cheap as $3,500 a semester (current price of attending SDSU [which four semesters ago cost ~$2,500) — UCSD is much pricier, of course, at ~$13,000 for the entire year [and, this doesn’t include parking, rent, books, et cetera], and USD charges ~$40,000). Some even get it cheaper through student aid (I not only attend for free, but get aid to help pay for my cost of living in general — the benefit of being an older, financially independent student). Even where students pay through student loans, you can get a high proportion of subsidized loans. Apart from subsidies, there also seems to be a culture fixated on the benefits of higher education, and so parents (in large part also because of higher real incomes) are more willing to subsidize their children’s education (this may breed contempt for jobs requiring a heavy degree of physical labor). The result seems to be too many college students and too little people seeking alternative means of improving their own human capital, such as trade schools.

I figure that people will shift out of four-year universities (or even waste their time in community colleges — I don’t know the average transfer rate, but in southern San Diego county it’s less than a quarter of all students) when they realize that the benefits, in relation to costs, are lower than other kinds of training and jobs. I don’t mean to make too much of a big deal out of the skills mismatch problem, as clearly I think there are other forces involved (some of which may be more important), but certainly our educational policies have played an important role in skewing the skills composition of our labor force. So, when we recognize the existence of skills mismatch, we should really be wary of advocating things like “improving human capital,” since the only person in a position to know in what direction to improve human capital is the individual — anything that can distort decision making can actually worsen the skills mismatch problem (that tend to reveal themselves during bad economic times, right when you wish there was more flexibility in the labor market).

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