Mitchell’s Musings 11-14-11: Back in the Day Employers Couldn’t Be Picky

Mitchell’s Musings 11-14-11: Back in the Day Employers Couldn’t Be Picky Daniel J.B. Mitchell The U.S. Bureau of Labor Statistics Job Openings Rate (vacancy rate) fell substantially in the Great Recession, as the chart below – which begins at the first available data point, December 2000 - shows.

Even at the peak of the housing/mortgage bubble in 2006, the rate was not as high as it had been in late 2000.

Job Openings Rate: Nonfarm (seasonally adjusted)

Similarly, the unemployment rate at the peak of the housing/mortgage boom never dropped as low as it did during the dot-com boom era. In many respects, therefore, the latter boom was only a partial recovery from the former.

Unemployment Rate: US Total (seasonally adjusted)

The job openings data unfortunately began at the peak of the dot-com boom and do not go back further in time for historical research. However, the old Beveridge definition of full employment was a situation 1

in which vacancies were equal to unemployment, i.e., there was a job for each job seeker, although for some reason the two – vacancies and people - were not being linked. By that definition, there was full employment at the peak of the dot-com boom, as the chart below – which runs through October 2011 shows. The ratio of vacancies to unemployment was roughly 1 at the end of 2000. In contrast, at the peak of the housing/mortgage boom, around 2006, there was only about three-fourths of a job for each job seeker.

So, was there ever a time before in which the kind of full employment we saw during the dot-com boom arose? Of course, there were periods of wartime when full employment – indeed, overfull employment – existed: World War II, the Korean War, and the Vietnam War. That fact might lead you to conclude that reaching full employment in peacetime hardly ever happens. But we don’t have to go all the way back to those wars to find such labor-market conditions. In fact, the late 1980s had similar characteristics, although, sadly, the job openings data were not available to give us a complete measurement.

In the late 1980s, there was much interest in then-existing labor shortages. I did a piece at that time for the Brookings Papers on Economic Activity looking at the issue and others attempted to construct Beveridge-type measures from what data were available.1 One of the interesting features of that

1

Daniel J.B. Mitchell. (1989). Wage Pressures and Labor Shortages: The 1960s and 1980s. Brookings Papers on Economic Activity, pp. 191-231. Available at http://www.anderson.ucla.edu/documents/areas/fac/hrob/mitchell_wage_pressure.pdf

2

period, particularly in some areas of the country, was that employers actively sought workers – whatever workers they could find. They sent vans to get them. They made whatever accommodations were necessary to obtain the labor they needed to fill jobs. And the folks who were recruited into those jobs were not just in the high-tech occupations. Retail, manufacturing, blue collar, white collar, all were in limited supply. All were scarce.

Check out the video on the “Massachusetts Miracle” of 1987 to get a sense of the labor market back then at http://www.youtube.com/watch?v=zO2ppa5iUEI. There was no talk back then of a jobsemployer mismatch as there is today. Rather, employers adjusted to prevailing conditions. Years before, the late Arthur Okun had coined a phrase for the phenomenon: a “high-pressure” labor market.2 It may seem counterintuitive but complaints about job mismatch – stories about how the jobs are really there but workers are not competent to fill them – tend to arise when unemployment is high. Why is that? Take a look at the job vacancy to unemployment ratio on the chart of the previous page. At the bottom of the most recent cycle, there were fewer than two jobs for every ten job seekers. If you were the rare employer doing a lot of hiring, and there always are some employers hiring, you could be very picky. And the typical employer who was doing hiring, the index suggests, effectively rejected eight out of ten applicants. Even now, the soft recovery has only brought the ratio up to around a fourth. So employers who are hiring nowadays can be thought of as rejecting three out of four job applicants.

Given those high rejection rates, there has to be some rationale at the micro level by whoever is making the hiring decision. Lots of applicants have to be refused. That is, as a hiring employer, you have to find lots of faults with lots of people. You have to find faults that in more prosperous periods you would have overlooked. Is it any surprise, therefore, that anecdotes about inadequate job seekers abound in the current period?

Such anecdotes should be seen as symptoms of a soft labor market with high unemployment, not causes of it. The only guide to policy they provide is that the economy needs a more robust recovery.

2

Arthur M. Okun, “Upward Mobility in a High-Pressure Labor Market,” Brookings Papers on Economic Activity, 1:1973, pp. 207-252.

3