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This article reviews the concept of skills mismatch in the labor market and examines its role in explaining ongoing low levels of hiring and high levels of unemployment during the current economic recovery.
The ongoing U.S. economic recovery has been characterized as a "jobless recovery." In other words, output growth has not yet been accompanied by a significant recovery in employment. Indeed, unemployment has remained persistently high since the official end of the Great Recession in June 2009. This situation has prompted policymakers to consider whether a skills mismatch in the labor market is having a dampening effect on hiring, even as more positions become available as the economy improves.1 A skills mismatch in the labor market is a misallocation between the attributes of individuals seeking jobs and the attributes employers require for their vacant positions. This misallocation leaves vacant positions open longer and forces job seekers to search longer to find work. This results in higher unemployment because it is harder for job seekers to find suitable work. It also results in weak hiring because it is harder for employers to find qualified applicants. It is important for policymakers to know whether or not there is a skills mismatch in the labor market, because the unemployment it creates is structural in nature. Structural unemployment is defined as the amount of unemployment that cannot be affected by changes in monetary policy. Furthermore, as recent news coverage has emphasized, structural unemployment often leads to a rise in the number of long-term unemployed, because these workers' skills become less relevant to employers over time.2
Economics of mismatch
Labor search theory provides the standard framework that economists use to study mismatch. It is based on the premise that there are "frictions" in the labor market that cause the matching of workers to jobs to be a time-consuming process. Search theories have been used in economics to study unemployment, wages, and employment dynamics over the business cycle. They are based on the seminal work by Peter Diamond, Dale Mortensen, and Christopher Pissarides.3 Subsequent models of labor market search have developed in a variety of ways. In the standard model of search, mismatch is the outcome of a decline in matching efficiency. Hiring is the outcome of the...