Recessions and Skill Biased Technical Change

A very fascinating and topical NBER paper (ungated pdf here) recently came out which investigates the connection between skill biased technical change (or routine-biased technological change, as these authors prefer to call it), which has been a major theme in the posts on The Wealth of Humans, and recessions.

One curious fact about the last several recessions is that their recoveries have been largely jobless. If we eyeball the growth in employment over the last several decades, it’s obvious we never returned to trend even after the 2001 recession.

employment

Furthermore, unemployment continued to rise even after the technical end of the post-1990 recessions.

fredgraph

The reasons for this have not been well understood, but the authors take an adjustment cost theoretical framework as a starting point.

We can imagine that as technology makes certain jobs less relevant while creating others, there are costs to employers in making the appropriate adjustments. Recessions can provide the necessary ‘oomph’ to reallocate labor and capital that wouldn’t happen in normal times. In this understanding, labor market adjustment to RBTC occurs episodically, not gradually.

I’m sure it’s not hard to visualize that person at the office who isn’t really necessary anymore since that new software can do 70% of their work, but is still around since the boss is a human being and can’t find a compelling reason to fire them. In these models, economic downturns provide the excuse to clear out inefficiencies that have built up over time.

While this makes intuitive sense, the question is whether there is data to back it up. Other authors have found that the vast majority of declines in middle skill employment have occurred during recessions, and subsequent recoveries have been jobless in precisely these occupations.

Still, these studies have lacked direct evidence on how firms were restructuring. That’s where this paper comes in: they’ve obtained a data set that contains huge amounts of online job postings in major metropolitan areas for the years 2007 and 2010-15.

They find first that employers in metropolitan statistical areas (MSAs) that were hit harder by the Great Recession had an increase in skill requirements in jobs ads relative to both those same areas before and MSAs less affected by the shock. Now, there are two possible causes of this: one could be that employers simply increased the asking skill levels for all jobs, or happened to be posting mostly high skill levels jobs and less low skill jobs. The authors find the former explains most of this ‘upskilling’: in a weak labor market, employers were able to demand higher skill levels for the same jobs relative to a few years prior or to MSAs with better economic conditions.

This leads to the next question: are these firms actually changing what they do, or are they merely changing the type of people they hire? The former implies Shumpeterian idea of a recession as a cleansing activity (and consistent with the adjustment cost explanation above), whereas the latter is more like taking opportunity of a slack labor market to get the type of people you wouldn’t normally be able to. The latter is temporary; the former, permanent.

Their results in analyzing the types of jobs posted and skills required ‘suggest that firms located in areas hit harder by the Great Recession were induced to restructure their production toward greater use of machines (or outsourced labor) and higher-skilled workers; that is, the Great Recession hastened the polarization of the U.S. labor market.’

Interestingly, they find that even within occupations (rather than between) there is a tendency to upskill that persists to the present; this is related to the phenomenon of ‘overeducation’, where supposedly college graduates are working as baristas in droves. Whether or not this particular example is true, the subtler thing they conclude is that the same jobs are changing as they employ higher skilled people.

What I’ve seen on the ground floor in the retail industry over the last several years is consistent with this theory. The types of activities required by the average retail employee, and especially managers, have increased in complexity and scope. Part of this is simple downsizing, as the recession made the higher ups realize there were a lot of inefficiencies, as well as online retailing taking out a chunk of sales. Part of it is technology like self checkouts enable fewer workers to be more productive at the same task.

But part of it is what this paper is saying: that another effect of recessions is that they enable employers to use employees in ways they hadn’t been able to before by bringing in new, ‘overqualified’ workers. I’ve seen the workload of a store manager become way more technically oriented compared with even just five years ago, when you could get by with pep talks and good customer service. Now (at least in my corner of the industry) you’re expected to be managing pharmacists (who make way more than you, by the way!) in the pursuit of some arcane efficiency metrics, in addition to doing all sorts of work that used to be done by district managers (who I’m sure are now stuck with work their bosses used to do). Old school managers can’t make it anymore; their 20+ years of service are now pretty much meaningless, because the skills of the job have shifted beneath their feet. It should come as no surprise the new generation of hires are young and have educations.

One key assumption they make is that the persistence of upskilling demand well into 2015 means it is not a cyclical phenomenon. I don’t think this will convince the demand die hards (those who believe the slow recovery is mostly due to a lack of demand in the economy), since they would argue that we’re still coming out of the recession (and so the opportunistic interpretation would take primacy). However, it’s convincing enough to me, in my own experience.

Still, I’m curious about how the lack of productivity growth over the past several years fits into this framework (as seen below in my makeshift output/employee productivity metric).

prod

Perhaps it’s that the jobs they mention as being particularly affected by this are in the non-tradeable (read: service) sector, which is already low productivity. Or it could be most of the productivity gains from restructuring only occurred in that burst during the immediate aftermath of the recession.

Or maybe a lot of the new skilled work is being channeled into activities that don’t show up in productivity statistics. To bring my retail experience in again, there’s been a lot of focus on customer service the last several years, which is of course a good thing for repeat sales and the like, but the expectations of this emotional labor have really gone through the roof of late (and you don’t get paid extra for it). This is a topic I could spend a lot of time dissecting, but we’ll leave that for another time.

Basically, this research seems to be a solid piece of evidence in favor of the explanation of the continuing weak employment recovery as primarily due to structural changes in the economy, rather than simply a matter of inadequate demand.

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