Incomplete and preliminary Skill Mismatches and Unemployment in the United States

The 2008-2009 crisis created large dislocations in the U.S. labor market: some sectors, locations, and occupations were more affected than others. As a result, researchers have been looking at the possibility of structural changes in labor market functioning, which may have created mismatches between available labor and employment opportunities; thus raising equilibrium levels of unemployment. As opposed to previous research that often uses a Beveridge curve framework to analyze the existence of skill mismatches in the labor market or changes in equilibrium unemployment levels, we study changes in the quality of the unemployment pool vis-à-vis the employment pool. We use information from the CPS monthly outgoing rotation groups for 1979-2011 to estimate wage equations based on observable characteristics and use the estimates to impute average wages for employed and unemployed workers, our sufficient statistics for ―labor quality‖. We show that quality differences between these two groups is procyclical and analyze the source of this cyclicality. In addition, we show that this quality differential remains negatively related to the unemployment rate even after controlling for aggregate and state-level variations in output, suggesting a possible noncyclical relationship between these variables. Turning to recent events, quality differentials between employed and unemployed individuals did not decline as much as suggested by the sharp rise in unemployment, suggesting an increase in skill mismatches. JEL Classification Numbers: J01, J08, J24, J6