Notes on the “skills gap”, SBTC, and the college wage premium

The idea of a “skills gap” is both confusing and overblown. The worst version of it was in the early post-recession years, when some people managed to convince themselves high unemployment was related to a “skills gap.” With unemployment now at ~4% they must really think Americans’ skills have improved!

There are still other incorrect “skills gap” theories out there. This post won’t really address them, but instead will clip together some stuff and make a few quick points that are at best loosely related. My basic view is that the “gap” part of “skills gap” confuses as much as it illuminates, and that the “skills” part, though overrated in some quarters, is equally underrated in others.

Who loves market failures? One thing that’s frustrating about the “skills gap” conversation is that it somehow manages to flip everyone’s typical ideological commitments in terms of market efficiency. Left-leaning folks, normally predisposed to see market failures everywhere — especially in the labor market — suddenly switch into a model of competitive labor markets and suggest that if employers really needed more skills, they’d pay higher wages to get them (or pay for training). Right-leaning folks, meanwhile, suddenly find in the “skills gap” story a market failure they can get behind! (I am not taking sides on this, however if you want to read about potential market failures related to skills and hiring, this is a good start.)

Supply and demand clearly matter in labor markets. This gripe isn’t specific to the discussion of skills. Basically, supply and demand are never complete explanations of anything. The model of supply-and-demand in a competitive market is always partial explanation, and often also a useful baseline. It’s a more- or less-good explanation depending on the context. It’s particularly ill-suited to labor markets, which are different and complex for a whole bunch of reasons. But that doesn’t mean supply-and-demand has nothing to say about labor markets. In fact, it seems they often can explain a very large chunk of what’s going on. Here’s one source: “The law of one wage, however, provides a surprisingly good first approximation of the structure of U.S. wages.” And here’s a piece I wrote about this. Some people are too quick to jettison supply and demand for skills as an explanation of the labor market, rather than combining it with other factors.

On skill-biased technological change and the college wage premium. This is another case where the move is 1) say that a model can’t fully explain what’s going on, then 2) dismiss it entirely even though it’s still totally useful. When I wrote about this I interviewed David Autor, who’s done a lot of the work on this:

The original idea of a “race between education and technology” — or “skill-biased technological change,” as it’s known in academia — posited that new technologies increase the demand for skilled workers. Therefore, when technology progresses faster than the supply of college graduates, the wage premium for college graduates will rise.

“As a rough depiction of 100 years of data, that’s a pretty good summary description,” said Autor, who specializes in this area.

The main reason left-leaning economists are growing dismissive of this seems to be the fact that the college wage premium hasn’t grown much since 2000. Again, at best that’s a reason to look for other partial explanations, not to toss this one aside. But a couple interesting data points on this: here’s a paper attributing the flattening of the college wage premium to housing costs in cities. Moreover, the college wage premium was always a proxy for skill. It’s possible it’s simply become a worse proxy over time. It’s worth noting that an analysis by Brookings found that digital jobs paid better even after controlling for education, suggesting to me that a better measure of skills — particularly related to digital technology — might not show a flattening premium. Here’s a comprehensive review of the evidence on skills and the labor market from Autor in Science.

What about the recession? I started by knocking the idea that post-recession unemployment was the result of a skills gap. There is a bit of evidence on a different but vaguely related idea, that after the recession employers started demanding more skills in job applications. There are a couple stories you can tell (monopsony power?) but even if it’s that the recession sort of “kick starts” technology investment, it’s just not plausible that this is a major explanation of unemployment post-recession.

Labor markets are complicated. Throwing out skills-based explanations of the labor market is as foolish as pretending they explain everything.

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