Wednesday, January 10, 2018

Labor shortages reported by firms

Via Twitter (H/T @traderscrucible), I came across this survey data about firms reporting shortages of "qualified" workers. It looks remarkably correlated with JOLTS data (e.g. here), so I ran it through the dynamic information equilibrium model. In general it works fine, but due to how short the series is there is some ambiguity in the dynamic equilibrium (there are two local minima where one is about 0.07/y, and the other is about 0.11/y). I thought this made for an interesting case study of which model we should believe.

Scenario 1:

0.07/y dynamic equilibrium.
2008.8 recession center (lagging indicator)
overshooting step response to recession
no indication of next recession (lagging indicator)


Scenario 2:

0.11/y dynamic equilibrium.
2008.9 recession center (lagging indicator)
no overshooting
signs of next recession (leading indicator)


Which is it? Neither dynamic equilibrium slope (or any other model parameter) seems wrong -- both are comparable to the 0.098/y value for JOLTS openings or the -0.096/y value for the unemployment rate. My guess is that Scenario 1 is correct because of its consistency as a lagging indicator at the expense of a completely plausible overshooting in survey data. It also seems unlikely that it would go from a measure with one of the longest lags to one with one of the longest leads (assuming the other JOLTS leading indicators are accurate there is another recession in the next year or so). It is of course arguable that the upcoming recession (if it is indeed upcoming) might be a different type of recession compared to the Great Recession and accompanying financial crisis (e.g. the financial crisis was a surprise, whereas low future growth due to a labor "shortage" is more slow-rolling). In either case, auxillary hypotheses are needed to resolve the ambiguity in either direction [1].

Whatever the final resolution, I thought it was fascinating that the outcome of survey data with a somewhat vague question (What does "qualified" mean to the survey respondent? [2] Are the firms answering "yes" to a perceived shortage offering below-market wages?) posed to human beings resulted in data that follows mathematical formula. True, it is probably because it is directly anchored by the unemployment rate. However, using this model we can potentially predict how humans will answer a question in the near future -- a question that I thought would be potentially clouded by politics. People report inflation of the deficit is higher if the President is of the opposite political party, so why wouldn't this affect whether you think it's easy or hard to find "qualified" workers ... and there is of course footnote [2].

...

Footnotes

[1] It should be noted that this isn't an indication of a degenerating research program per Lakatos: eventually more data will resolve the dynamic equilibrium slope.

[2] To a significant fraction of HR managers hiring for particular jobs, "qualified" includes being white and male per numerous studies of e.g. submitting resumes with different genders or names that 'sound black' and 'sound white'.

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