Svensson on employment matching: Better monetary policy can help.
Lars Svensson: Appropriate Monetary Policy Improves Employment Matching Issues
A blog about business and economics.
Jan. 23 2013 9:09 AM

Lars Svensson: Appropriate Monetary Policy Improves Employment Matching Issues

A major talking point of demand skeptics both in the United States and apparently elsewhere has been that high unemployment is a sign of employment matching problems—difficulty linking appropriately skilled workers with in-demand jobs—rather than low demand. Broadly speaking, you can tell from the macro aggregates that this is mistaken. An economy suffering from a normal level of demand but an unusually high level of skills mismatch would see lower-than-usual real output and higher-than-usual inflation. If you're seeing lower-than-usual real output and lower-than-usual inflation, that's a demand problem.

But (via Cardiff Garcia), monetary policy superstar Lars Svensson, whose colleagues at the Sveriges Riksbank have sadly taken to ignoring him, has a smart argument (see page five of this PDF) that inappropriately tight money actually causes these employment mismatch phenomena:

It is often said that the matching of jobseekers to job vacancies is not functioning as well now as it did before, and that monetary policy cannot do anything about this. The discussion in the Fiscal Policy Council’s report for 2012 (Fiscal Policy Council 2012) is relevant in this context. This shows that matching for both experienced and inexperienced labour is sensitive to demand fluctuations and improves when demand in the labour market improves. It is however more sensitive to economic fluctuations in the case of inexperienced labour. This means that if the demand for labour increases, matching improves most for inexperienced labour.
The business cycle, and thus monetary policy, therefore plays a role for the matching process, and a more expansionary monetary policy that leads to a higher demand for labour improves matching most for the vulnerable groups. Monetary policy can thus contribute to improving matching in the labour market. The deficiencies in matching are, in the current economic downturn, an argument in favour of more, not less, expansionary monetary policy.

Try to recollect the very tight labor market of the late-1990s. One sign of that labor market was that it was much easier than it's been since that time for people to bargain for higher pay. But employer aversion to paying people more didn't suddenly vanish. So employers who didn't just want to hand out raises willy-nilly found that they had to be a bit less choosy about who they were willing to offer a job to. And it turns out that with a little extra work it's perfectly possible to train someone up who doesn't have 100 percent of the exact qualifications you're looking for. In an even more dramatic example you might think of World War II and the Rosie the Riveter phenomenon. Rosie was not a skilled aerospace engineer before she got that riveting job. The whole point was that the government needed both a massive expansion in the quantity of aircraft produced and also needed to divert a huge share of the male labor force into the military. But the Roosevelt aAdministration didn't just throw its hands up, say "skills mismatch" and lose the war.

Adopting a wartime production model would not be appropriate for peacetime, but contemplating an extreme example just helps to show that employment match is not completely independent of demand considerations. If we had more demand, we'd see more effort on both the employer and the employee side going into fixing matching problems because the rewards would be greater.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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