economy

Is There a Better Case for Skills Than the Skills Gap?

/ The Old Crank / 1 Comment

Yesterday, Dean Baker of the Center for Economic Policy and Research posted an article that references an interesting policy brief put out by the Boston Fed on the relationship between unemployment and job vacancies. [1] Both Baker’s article and the brief are more than a little bit wonky, but worth reading, especially if you are confused—as I often am—about whether the oft-cited “skills mismatch” argument helps or hurts our case for greater public investments in job training and adult education.

Also known as structural unemployment, the skills mismatch argument, in a nutshell, attributes our current high unemployment numbers to workers not having the skills that employers need. Baker and others think this explanation for our current unemployment problem is way off base, and he kvetches about this on a regular basis on the CEPR Blog and his own blog, Beat the Press. As he and fellow critics argue, if we were truly suffering from structural unemployment, you’d expect to see big wage increases for those who do have the skills employers need—but that hasn’t happened. Moreover, the increase in unemployment during the recession has been pretty uniform across most occupations and industries, and on workers at all education and skill levels. (In the world that I work in, people often cite the lower unemployment rate for highly educated workers over less educated workers as further evidence of the skills mismatch, but this is actually always the case, and thus tells us nothing about whether or not the economy has a structural unemployment problem.)

Critics of the skills mismatch theory argue that the rise in unemployment is actually due to an aggregate drop in demand across the economy. (Best example of this is the collapse of the housing bubble, which depressed demand for new housing, plus had ripple effects across the economy, as people who lost value in their homes reduced their spending, which leads to businesses contracting and laying off workers.) Their argument is pretty convincing, at least when looking at the economy as a whole.

Getting back to Baker’s post yesterday, apparently Team Structural Unemployment has recently been highlighting an outward shift in something called the Beveridge Curve as a point in their favor. Baker’s post and the Boston Fed brief do a good job shooting down this argument, which I won’t go into here since you can read what they have to say for yourself.

The point is, every time I read an argument claiming a major structural unemployment problem—at least at the macro level—it seems to be pretty deftly shot down by critics.

Nonetheless, I don’t see why the lack of evidence for structural unemployment should diminish the case for job training and adult education as an investment. I suppose that there is a danger that overzealous arguments dismissing the skills gap might suggest to some that there is no point in providing job training or adult education at all, but I don’t think that’s a significant worry. At a city or regional level, I don’t know why some unemployment couldn’t still  be the result of a structural change even if that’s not the case for the country overall. For example, I know when manufacturing abandoned northern New England in the 1990s, new higher-skilled jobs did appear—even if not enough to replace all the lost manufacturing jobs—and these jobs required higher reading and writing skills. And in the comments section to Baker’s post, Bob Spencer argues that while it does appear that the economy is not generating enough jobs (especially good jobs), we do have a “structural” problem that existed pre-recession, noting low graduation rates in Virginia, where he lives. He suggests that there is a shortage of both jobs and a “quality” workforce.

I think that’s about right. On a macro level the numbers aren’t there to support the argument that there is a large-scale structural unemployment problem—at least no more than was the case pre-recession. There was—and is—a lack of economic opportunity for low-skilled workers—one that can be addressed in part by investing in adult education and training. But if the jobs aren’t there, no amount of training will fix that, which suggests that, at best, there are limits to “educating our way” to prosperity, as the Secretary of Education likes to say.

Which is why I wouldn’t mind pivoting away from the skills mismatch argument as a key message in our advocacy. Not because it’s wrong—as I explain above, I don’t see why skill deficits couldn’t still be a factor in certain parts of the country in some situations—but because it’s troubling to me that this argument may play into the hands of those who stand in the way of policies that would benefit low-skilled, low-income adults every bit as much as education and training do, and shift too much of the burden of solving our unemployment problem on the unemployed themselves. As Jared Bernstein, another structural unemployment critic, writes here: “a failure to discern structural impacts from cyclical ones…. allows policy makers to nudge aside weak demand as a key diagnosis and instead blame the unemployed for not having the skills employers need.”

The problem I have with the skills gap argument is twofold: First, claiming—incorrectly—that our unemployment is structural works against the notion of using government spending to generate more demand in the economy. After all, if unemployment is largely due to a skills deficit, and not demand, than increasing demand through government spending won’t do much good. But flat or reduced government spending not only limits potential job growth in the economy, it limits federal spending available for things like… more job training and adult education. In other words, a widespread belief in structural unemployment contributes to the lack of support for increasing government spending, and increasing spending on federal job training and adult education programs is what we are advocating for in the first place.

Secondly, the widespread belief in the skills gap is a distraction from other policies that would make more of the jobs that are available now into good jobs (those that pay a living wage, provide health benefits, etc.). (I would argue, in fact, that a low-skilled worker without a high-school diploma, making minimum wage and receiving no health benefits, might be way better off in the short-term with an immediate wage boost and health insurance than with enrollment in a GED class, even if improving their skills/credentials is likely to increase their long-term economic prospects. More importantly—the economic stability that would likely result from that wage/benefit increase would likely put that person in a better position in the long-term to take advantage of and succeed in additional education/training.)

There is no doubt that there are large numbers of people who would benefit from adult education and occupational skills training, but that was true before the recession caused the drop in demand that is largely responsible for the high levels of unemployment we have today. In other words, the recession doesn’t seem to have exacerbated the structural employment issues that existed pre-recession.

We also know that there is actually a larger set of interconnected povery-reducing policies beyond education and training that impact the lives of low-income, low-skilled adults—and that support overall economic growth as well. Putting aside the skills gap argument, and talking about the need for job training and adult education in terms of increasing economic opportunity and improving the quality of our workforce might be a better way capture all of these interconnecting issues while still being responsive to employer needs.

POSTSCRIPT:

A few months ago, Bernstein suggested a possible way to make the case for skills that doesn’t rely on the notion of a skills deficit:

I still think we’d have a better economy/society with higher levels of educational attainment…I’m quite certain, in fact.  It’s wrong to think that the jobs of the future all will demand wicked high skill sets—we’re going to need lots of home health aides, cashiers, security guards, equipment technicians, child care workers, along with high-end engineers. But to have smarter, better educated people in all of those jobs makes all the sense in the world.  We want our child care workers and home health aides to be highly trained—not as Ph.Ds in robotics, but in their fields.

In other words, it doesn’t necessarily require a skills mismatch economy to make the case for higher skills.

[1] “What Can We Learn by Disaggregating the Unemployment-Vacancy Relationship?” by Rand Ghayad and William Dickens. While issued by the Boston Fed, it’s worth noting that this paper does “not necessarily reflect the official position of the Federal Reserve Bank of Boston or the Federal Reserve System.”

Politics of the Charitable Deduction, Part II

/ The Old Crank

(Updated below)

Earlier today the White House released a new report from the National Economic Council) that argues forcefully against the idea of a fixed-dollar-amount cap on tax deductions for taxpayers at all levels of income as a viable deficit-reduction strategy. This follows a White House blog post from last Friday by Jason Furman and Gene Sperling, two of President Obama’s top economic advisers, that was also critical of the idea; and a story in The Washington Post, also from last Friday, about a document “being shared with congressional Democrats and other White House allies” that contained “a rebuttal to Republican arguments that eliminating loopholes and deductions could raise just as much money for deficit reduction as raising the income tax rates on top earners.”

In all cases, the administration’s analysis has been focused on a $25,000 fixed-dollar-amount cap on deductions. (I don’t believe the Republicans have actually made a specific proposal yet regarding a cap on tax deductions, other than general support for the idea of limiting deductions and loopholes.)

In addition, the administration’s initial set of objections to the idea of a fixed-dollar-amount cap never appear to have mentioned the President’s own longstanding proposal to lower the cap on deductions at 28% for those earning more than $200,000 a year (and married couples earning more than $250,000 a year), which led me to speculate whether the administration was quietly tabling that idea as well. In the Post article from last Friday, for example, there was a specific reference to a White House desire to “preserve tax breaks for charitable giving,” and no mention of their earlier proposal that would do just that (although in a much, much less substantial way than a fixed-dollar-amount cap would do).

But by late yesterday, just as nonprofit interest groups were leaving town after a huge lobbying effort this week to protect the charitable deduction, that 28% proposal started seeing some daylight again. Most significantly, it was specifically mentioned as an alternative in that National Economic Council report issued this morning. This report contains a more detailed argument as to why a dollar amount cap is a bad idea, (in a nutshell, they argue that it basically wipes out the charitable deduction because under a fixed-dollar-amount cap, after people take their mortgage deduction and other automatic deductions, they’ll hit or already be above the cap). But now they are also making a reinvigorated pitch for the President’s 28% deduction cap on top earners as a responsible alternative.

In an earlier post I suggested that the specific critique coming from the White House last week didn’t matter as much as the fact that the they were coming out so strongly against a cap on deductions at all, without mentioning the President’s earlier proposal. I initially thought that the absence of any reference to that earlier proposal might have meant they were backing off of it completely, which was not the case.

What’s interesting to me about all this is that the nonprofit interest groups, while obviously much more alarmed about the impact of a fixed-dollar-amount cap, (and I think the administration has made a strong case that there is in fact a big difference between a fixed-dollar-amount cap on all taxpayers and a 28% cap on top earners only) were really unhappy about the 28% cap idea when the President first introduced it. Have those groups softened their opposition? If so, is it because the administration has convinced them that the 28% cap is not going to have a significant impact, or is it because they are convinced that at least it’s not as bad as what the Republicans want to impose? (It’s also worth noting again that just after the election, both parties were talking about deduction caps, and less of a distinction was made between Romney and the President’s approaches.)

UPDATE 12/10/12: As I mentioned above, groups that represent the nonprofit sector in D.C. had been pretty clear that were opposed to any changes to the charitable deduction rules. Here is an article from The Philanthropy Journal from just after the election that summarizes this opposition.

Again, White House is now positioning their earlier proposal to limit deductions to 28% for high-income taxpayers as a responsible alternative to what essentially was Mitt Romney’s proposal to limit deductions. I’m still not clear to what extent anyone since the election is still really pushing the fixed-dollar-amount cap he proposed.

Interesting Look at How Federal Investments Drove Job Growth in Charlotte

/ The Old Crank

(Updated Below)

For anyone interested in job creation and job training—and the debate over the federal role in both—this story on a new Siemens turbine plant in Charlotte in yesterday’s Washington Post is probably going to be more interesting than anything you’ll read coming out of either of the political conventions:

Ask Siemens executives why they placed their bet on Charlotte and they talk about public investments such as the state-funded rail spur that runs through their facility and the city’s international airport, which recently added a fourth runway using $132 million in federal funds.

They talk about the Export-Import Bank, an independent federal agency that in January approved a $638 million loan to finance the sale of turbines to Saudi Arabia, helping Siemens beat bids from companies in Germany, South Korea and Japan.And they talk about the quality of the workforce in Charlotte, where local leaders are retooling the public education system to churn out the engineers and skilled technicians needed to operate one of the most efficient gas-turbine plants in the world.

My only quibble with this piece: I don’t understand why the austerity budgets “favored by the GOP” are set aside as if they are somehow separate from Romney’s position.

Romney’s plan for growth centers on slashing government spending while cutting tax rates sharply for everyone. Romney claims his approach would create 12 million jobs over the next four years, a conclusion that relies heavily on research by Alan Auerbach, an economist at the University of California at Berkeley.

Auerbach, who has studied the economic effects of tax cuts, said lower taxes on savings and investment do cause people to plow more money into new investments, which “should lead to faster economic growth.” But “how much, how fast” is harder to say, Auerbach said. And that approach is, in any case, less likely to be effective in a sluggish economy, he said, when businesses are holding back on new investments not because they do not have the cash but because they are “looking first at whether they can sell stuff.”

“If the question is what would [Obama and Romney] do right now to spur economic activity,” Auerbach said, “I’m not sure either platform is particularly well designed for that.”

Meanwhile, the austerity budgets favored by the GOP would cut government spending in the very areas that do seem to matter. (my emphasis) In his most recent budget, Romney’s vice-presidential running mate, House Budget Committee Chairman Paul Ryan (R-Wis.), proposed spending 25 percent less on transportation over the next decade than Obama and 31 percent less on education and training.

As part of their campaign to shrink the size of government, House Republicans also tried to kill the Export-Import Bank, which encourages exports by financing the foreign purchase of U.S. goods and services, turning a profit for taxpayers. Spiegel said the bank was a critical factor in Siemens’s decision to build turbines for export in the United States. 

Romney has endorsed the Ryan budget cited here. It’s not as if Romney has one approach and House Republicans have another one that is on some kind of separate track (“meanwhile”). Whatever the merits are of Romney’s proposal to cut tax rates in order to spur growth, by endorsing that budget, he has completely embraced the federal infrastructure and education spending cuts proposed by Ryan and his party. Those spending cuts are just as much a part of his approach as his tax rate cut proposal. And if those cuts “do seem to matter,” then the differences between the two candidate’s approaches are perhaps more significant than this article suggests.

UPDATE 9/5/12 7:22pm: Added the last sentence and edited the whole piece slightly for clarity and emphasis.

Most Poor People Graduated From High School

/ The Old Crank / 1 Comment

My guess is that a lot of people may assume that the majority of those who live in poverty are high-school dropouts—and certainly not college graduates. The fact that a vast majority of poor people finished high school, and quite a few went to college, might mean that economic policies slightly more sophisticated than “educating our way to prosperity” may be required to help people work their way out of poverty in the U.S.