Concern over skills mismatch overblown: U.S. Fed paper

Gaps likely to narrow as economic recovery continues
||Last Updated: 05/01/2012

LOS ANGELES (Reuters) — High United States unemployment does not signal a widening gap between employer needs and worker skills, according to research published by the Federal Reserve Bank of San Francisco, suggesting the U.S. central bank's super-easy monetary policy poses little imminent danger of sparking inflation.

Unemployment registered 8.2 per cent in March, down sharply from last summer but still much higher than the 5.5 per cent that has historically been equated with full employment.

That's despite more than three years of near-zero interest rates and two rounds of bond buying by the Fed to encourage growth and employment.

Some economists and Fed policy-makers, notably Minneapolis Fed president Narayana Kocherlakota, believe structural factors like skills mismatch are boosting the unemployment rate.

If the lofty jobless rate reflects employers' difficulty in finding suitably skilled workers, they warn, wages could start to rise sooner than might otherwise be expected, forcing the Fed to raise interest rates to head off inflation.

But if, as the San Francisco Fed paper suggests, skills mismatch is only a small and transitory part of the equation, a rise in inflation is less likely.

"Skill mismatches can affect how fast employment can grow and the rate of unemployment that the economy can sustain without igniting inflation," David Neumark, a University of California, Irvine professor and visiting scholar at the San Francisco Fed, and San Francisco Fed research advisor Rob Valletta, wrote in the latest San Francisco Fed Economic Letter.

A review of research presented at a recent San Francisco Fed conference shows that skill mismatches have contributed only minimally to the overall unemployment rate, and that any gaps that have developed are likely to narrow as the recovery takes hold, they wrote.

"Concerns about growing skill mismatches may be overblown," they concluded.

Still, such concerns persist.

On Friday, Barclays economist Cooper Howes noted a government report showing a 0.5 perc ent quarterly increase in wages.

"We would expect to see even weaker wage inflation if there were still significant labor market slack," he wrote. "This level of wage inflation is consistent with our view that the natural rate of unemployment, or NAIRU, has risen over the past few years due to such factors as skills mismatch and the high level of long-term unemployment."

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