1. society
2. work
3. unemployment

Rhode Island Unemployment:
Is There Labor Market Mismatch?
BY
Neil Mehrotra, Ph.D.
Brown University
2015
WORKFORCE
2015
REGIONAL COMPETITIVENESS
WILL EXPANDING MEDICAID HELP THE ECONOMY?
50 Park Row West, Suite 100
Providence, RI 02903
www.collaborativeri.org
Amber Caulkins
Program Director
[email protected]
401.588.1792
The College & University Research Collaborative (The Collaborative)
is a statewide public/private partnership of Rhode Island’s 11 colleges
and universities that connects public policy and academic research. The
Collaborative’s mission is to increase the use of non-partisan academic
research in policy development and to provide an evidence-based
foundation for government decision-making. The Collaborative turns
research into action by sharing research with policymakers, community
leaders, partner organizations, and the citizens of Rhode Island.
CURRENT Research Projects
WORKFORCE
The Economic Benefits of a Flexible Workplace
by Barbara Silver, Ph.D., University of Rhode Island
The Knowledge, Skills, and Abilities Needed for Growing Occupations in Rhode Island
by Matthew Bodah, Ph.D., University of Rhode Island
Neil Mehrotra, Ph.D., is an assistant professor in the Department of
Economics at Brown University. He
earned his Ph.D. in Economics at
Columbia University in 2013 focusing on macroeconomics and labor
markets. He received an A.B. in Economics from Princeton University in
2005. Prior to his graduate studies,
he worked in the Global Investment
Research division at Goldman Sachs
in New York.
His academic research focuses
on the effects of the Great Recession on US labor markets and the
role of monetary and fiscal policy in
counteracting the Great Recession.
Current projects on the labor market side examine the effect of the
financial crises on firm expansion
and job flows, and the contribution
of sectoral disruptions to the shift in
the US Beveridge curve experienced
in the Great Recession.
Preparing Rhode Island’s Workforce for the Jobs of the Future
by Elzotbek Rustambekov, Ph.D., Bryant University
Rhode Island Unemployment: Is There Labor Market Mismatch?
by Neil Mehrotra, Ph.D., Brown University
INFRASTRUCTURE
Improving Infrastructure through Public Private Partnerships
by Amine Ghanem, Ph.D., Roger Williams University
Millennials on the Move: Attracting Young Workers through Better Transportation
by Jonathan Harris, M.I.D., Johnson & Wales University
The Road to Better Bridges: Strategies for Maintaining Infrastructure
by Nicole Martino, Ph.D., Roger Williams University
REGIONAL COMPETITIVENESS
Choosing a Health Exchange for Rhode Island
by Jessica Mulligan, Ph.D., Providence College
The Economic Impact of Expanding Medicaid
by Liam Malloy, Ph.D., University of Rhode Island; Shanna Pearson-Merkowitz, Ph.D., University of
Rhode Island
Ensuring Paid Family Leave Pays Off
by Shanna Pearson-Merkowitz, Ph.D., University of Rhode Island
Rachel-Lyn Longo, Student Researcher, University of Rhode Island
Strategies for a Competitive Rhode Island
by Suchandra Basu, Ph.D., Rhode Island College; Ramesh Mohan, Ph.D., Bryant University; Joseph
Roberts, Ph.D., Roger Williams University
MANUFACTURING
Rhode Island’s Maker-Related Assets
by Dawn Edmondson, M.S., New England Institute of Technology; Susan Gorelick, Ph.D., New England
Institute of Technology; Beth Mosher, MFA, Rhode Island School of Design
WILL EXPANDING MEDICAID HELP THE ECONOMY?
Rhode Island Unemployment:
Is There Labor Market Mismatch?
Neil Mehrotra, PH.D, BROWN UNIVERSITY
As our economy develops over time, the demand for different
kinds of work rises and falls. Farming gave way to manufacturing,
which in turn has been eclipsed by knowledge and service jobs.
Unfortunately, workers often have a hard time keeping pace
with these changes. A factory worker laid off during the Great
Recession, for instance, may not have the skills or experience
to jump into a growing industry like education or health care.
When entire categories of workers are displaced from declining
industries and find themselves unable to transition into growing
industries, workers are said to be “mismatched” with available
jobs.
Economists and policymakers have voiced concerns that labor
market mismatch (sometimes called structural unemployment)
contributed to the high levels of unemployment experienced in the
U.S. since the Great Recession. What role has mismatch played
in Rhode Island, which has had one of the highest unemployment
rates in the country in recent years?(a) My analysis indicates
(a) As of December 2014,
Rhode Island had the fifthhighest unemployment
rate in the country – 6.8%
compared to the U.S.
average of 5.6%. The state’s
unemployment rate peaked
at 11.9% in the winter of
2009/2010, while the national
rate topped out at 10.0%
around the same time.
that, while labor market mismatch may play a part, it does not
appear to be the dominant factor explaining why Rhode Island’s
unemployment rate has been so much higher than the rest of the
country.
The Collaborative | March 2015
2
Rhode Island Unemployment: Is There Labor Market Mismatch?
Fig. 1 Unemployment Rates in New England
14%
CT
12%
MA
10%
NH
8%
RI
6%
4%
2%
0
77
78
79
81
82
83
84
86
87
88
89
91
92
93
94
96
97
98
99
01
02
03
04
06
1976
07
08
09
11
12
2013
Source: U.S. Bureau of Labor Statistics
Labor Market Mismatch and the Great Recession
Labor market mismatch refers to situations in which unemployed workers
searching for jobs cannot connect with available job openings.
Mismatch can occur when workers lack the right
industry experience or educational skills to fill
available jobs. A former metalworker, for example,
cannot simply walk into a hospital and get a job as
a nurse. It can also take the form of geographical
mismatch, where open jobs and willing workers
are located in different regions.
typical U.S. Beveridge curve is shown in blue in
Figure 2).1 During periods of economic expansion, the economy is at the top left side of the
curve, as more jobs are opening up and unemployment is low. Recessions involve movement to
the lower right part of the curve, as job openings
fall and the unemployment rate rises.
Shifts in the industrial or geographical distribution of jobs can lead to labor market mismatch
when workers cannot adapt to these changes.
Mismatch results in a higher unemployment rate
as available jobs remain unfilled because, even
though there are available workers, they are not
the right fit for the jobs.
Since the end of the Great Recession in 2009, the
Beveridge curve appears to have shifted outward,
which is typically a sign of increased labor market
mismatch (the post-recession Beveridge curve is
shown in red in Figure 2). Job openings started
rising after the end of the recession, but without
the corresponding decline in unemployment we
would typically expect. In essence, firms started
posting more open positions but did not quickly
hire workers and reduce the unemployment rate,
possibly because unemployed workers weren’t a fit
for these jobs.
One of the main ways to visualize the match between workers and jobs is the Beveridge curve,
which depicts the relationship between the unemployment rate and the job openings rate (the
3
The Collaborative | March 2015
Rhode Island Unemployment: Is There Labor Market Mismatch?
Fig. 2 Beveridge curve
The Beveridge curve depicts the relationship between
An outward shift in the Beveridge curve is typically a
The U.S. Beveridge curve has shifted outward in the
the unemployment rate and the job openings rate.
sign of increased labor market mismatch.
years since the Great Recession.
Source: U.S. Bureau of Labor Statistics
Despite the shifts in the Beveridge curve, there
remains debate about how much labor market
mismatch is responsible for the national rise in
unemployment since the recession. One recent
analysis found that mismatch could explain at
most about a third of the increase in unemployment experienced in the U.S.2 The remainder of
the rise in unemployment is likely due to factors
that impacted all industries equally, like a shortfall
in aggregate demand as consumer budgets tightened due to the financial crisis.3 Some argue that
large public sector job losses4 or government policy responses to high unemployment, such as extensions of unemployment benefits,5 also played
a role.
Mismatch Unemployment in Rhode
Island
Rhode Island has historically had an unemployment rate roughly comparable to, though at times
slightly higher than, its New England neighbors
(see Figure 1). But since the start of the Great Recession, it has pulled away and experienced one of
the highest unemployment rates in not only the
region, but the country as a whole.
What is driving Rhode Island’s exceptionally
high unemployment rate? If we look at possible
explanations for the shift in the U.S. Beveridge
curve – and any associated rise in unemployment
– we may be able to identify factors that played an
exaggerated role in Rhode Island. This could help
explain why the state’s unemployment rate has
been so much higher than the rest of the country’s.
The Construction Industry
The shift in the U.S. Beveridge curve may be
the result of labor market mismatch caused by a
sharp fall in employment in the construction sector due to the housing crisis. Between the peak
of the housing bubble in 2005 and the depths of
the Recession in 2008, the industry lost 3 million
jobs, and laid-off workers may have a had a hard
time transitioning to other sectors.6 Although
construction only accounts for about 5% of total
employment in the U.S., recent research suggests
that declines in the construction industry may explain a significant portion of the national shift in
the Beveridge curve and associated increases in
unemployment.7
The Collaborative | March 2015
4
Rhode Island Unemployment: Is There Labor Market Mismatch?
Fig. 3 Employment by Industry in New England
Fig. 4 Time For Firms To Fill Job Openings
DAYS
Fastest growing firms
(20% employment growth/month)
Average firms
Stable firms
(0% employment growth)
Source: Davis, Faberman, & Haltiwanger, 20138
Source: U.S. Bureau of Labor Statistics
(b) Manufacturing is another
industry that has been hit
hard in recent years and
in which laid-off workers
can have a difficult time
transitioning to other fields,
potentially leading to labor
market mismatch.12 However,
as with construction,
manufacturing isn’t more
prominent in Rhode Island
than in neighboring states or
the country as a whole (see
Figure 3).
Could job losses in the construction industry also
explain the exceptionally sharp rise in unemployment experienced in Rhode Island? As Figure 3
shows, pre-recession employment in construction
was not noticeably higher in Rhode Island than in
other New England states and was substantially
lower than in the U.S. as a whole. So it is unlikely
that construction job loss explains why the state’s
unemployment rate has been so much higher than
in the rest of the country.(b)
Fast-Growing Firms
Another potential explanation for the shift in the
U.S. Beveridge curve is related not to labor market mismatch, but instead to the types of companies hiring. This argument focuses on the behavior of fast-growing firms, which typically fill job
openings much more quickly than stable firms.8
A firm that is replacing a departing worker will
take longer to fill that opening than an expanding
firm that is hiring for new positions. If the Great
Recession adversely impacted fast-growing firms
more than stable, slow-growing firms, that effect
could account for the shift in the Beveridge curve
– the firms that typically hire most quickly would
account for less hiring, thereby lowering the rate
at which open jobs are filled.9
Did fast-growing firms play a role in Rhode Island’s high levels of unemployment? New and
5
The Collaborative | March 2015
young firms (those less than five years old) tend to
be the fastest growing. As Figure 5 reveals, Rhode
Island actually has lower employment at new and
young firms than the nation as a whole. This suggests that trouble at fast-growing firms didn’t play
a particularly important role in raising Rhode Island’s unemployment rate, compared to the rest of
the country.
In short, two possible explanations for the shift in
the U.S. Beveridge curve – the troubles faced by
the construction industry and fast-growing firms
during the Great Recession – do not appear to explain why unemployment was so much worse in
Rhode Island than in the rest of the country.
Other Explanations for Rhode
Island’s Unemployment Spike
Educational Attainment
One factor that may have played a role in Rhode
Island’s high unemployment rate is educational
attainment, an area where the state lags behind its
counterparts. As Figure 6 shows, the state’s labor
force is markedly less educated than the workforce of other states in New England, in terms
of both high school and college graduates. This
is significant because research demonstrates that
unemployment tends to spike more sharply during recessions for workers with lower educational
attainment.10 Furthermore, if labor market mismatch is a factor, low levels of education can create obstacles to transitioning workers from lowand middle-skilled industries to higher-skilled
Rhode Island Unemployment: Is There Labor Market Mismatch?
Source: U.S. Census, Business Dynamics Statistics
industries. Therefore, differences in educational
demographics are likely a substantial factor in the
sharper rise in unemployment in Rhode Island
relative to the rest of New England.
Disparities in educational attainment, however,
are unlikely to be the whole story. Educational
attainment in Rhode Island roughly matches national averages, and the state’s workforce is better
educated than the workforce of many other states
that did not suffer as heavily from unemployment
during the recession.(c) Moreover, differences in
educational attainment are a longer-term trend
and likely do not explain why Rhode Island’s
unemployment rate has become so much greater
than the rest of the country only in recent years.
Household Wealth
Another potential explanation for the sharp rise
in unemployment in Rhode Island is a drop in
household wealth due largely to the housing crisis and its effect on home prices. As a recession
reduces families’ incomes and wealth, they spend
less, leading to lower profits for local businesses,
who may lay off workers in response. According
to one study, a decline in housing wealth was responsible for nearly half of the national increase in
unemployment during the Great Recession.3
Fig. 6 Education Level of the Workforce
Percentage of Workers
Percentage of Workers
Fig. 5 Employment at New and Young Firms
Source: U.S. Bureau of Labor Statistics
Household wealth was certainly hit harder in
Rhode Island than in neighboring states during
the recession. In Providence County, housing net
worth fell 17% from 2007 to 2009,3 while the largest counties in Connecticut, New Hampshire, and
Massachusetts experienced less severe contractions in housing wealth.(d) The negative impact
of the recession on household wealth and thus on
consumer demand could plausibly account for the
more severe rise in unemployment experienced in
Rhode Island compared to its neighbors.
Unemployment Benefits
A final factor to consider is Rhode Island’s extension of unemployment benefits for a longer period
of time than its neighbors. At the end of 2012, for
instance, Rhode Island offered 99 weeks (nearly
2 years) of unemployment benefits, while Massachusetts and New Hampshire provided only 40
weeks. This differential is partly a function of the
fact that unemployment rose more in Rhode Island than in neighboring states, but it may have
had unintended consequences.
(c) According to the U.S.
Census, Rhode Island
ranks 35th in the U.S. in the
share of its population with
a high school degree and
13th for college degrees.
Several states that rank
below Rhode Island in
educational attainment
– like Texas, Oklahoma,
and Idaho – nonetheless
have significantly lower
unemployment rates.
(d) For example, housing
net worth dropped 7% in
Fairfield County, CT (home
to Bridgeport and Stamford),
4% in Hillsborough County,
NH (home to Manchester),
and 6% in Suffolk County, MA
(home to Boston).3
Recent research at the national level indicates
that extensions of unemployment benefits beyond
the typical 26 weeks may have elevated the U.S.
unemployment rate by as much as 3.3 percentThe Collaborative | March 2015
6
Rhode Island Unemployment: Is There Labor Market Mismatch?
(e) In the long run, workforce
development programs
benefit individual workers
more than wage subsidies
because they increase
workers’ human capital.
Workers with higher levels of
education and training earn
more and are more likely to
be employed.
age points in 2010 and 2.5 points in 2011.5 As for
Rhode Island in particular, since the expiration of
extended benefits in December 2013, unemployment dropped from 9.2% to 6.8% by the end of
2014 – one of the fastest declines in the nation.
However, the view that unemployment extensions
raise the unemployment rate remains a contested
area of research among economists.
Education & Workforce
Development as a Solution to
Unemployment
One clear way to address labor market mismatch
is to ensure workers have the skills and expertise
needed for available jobs. In both national and
state discussions of weak employment and wage
growth over the last decade, the focus has often
turned to education and workforce development
as a way to ensure that workers are a fit for jobs.
What role should these policies play in Rhode Island’s recovery from the Great Recession and its
long-term strategy for economic competitiveness?
Education and workforce development programs
carry obvious benefits for workers by allowing
them to modernize their skill sets and train in
specializations that are growing.(e) These programs
can be carefully targeted to address circumstances
unique to a given state or region or to help retrain
particular groups of workers. Research on the impact of workforce investment programs has found
mixed results depending on the local context and
the type of program, but overall it suggests that
there are some benefits to workers in terms of
higher employment rates and wages.11
While publicly-funded education and workforce
development programs have a number of benefits,
they are not always the most effective solution for
getting people back to work quickly. In a time of
high unemployment, such policies act as a wage
subsidy by lowering the effective cost of hiring a
worker. A better trained worker provides greater
value for a firm at any given wage, inducing firms
to do more hiring. However, this subsidy benefits
only the particular firms and industries who hire
Fig.7 Number of Firms that Benefit from Different Types of Hiring Incentives
Workforce
Workforce
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programs.
7
The Collaborative | March 2015
Lower
Lower
Payroll
Payroll
Taxes
Taxes
Direct
Direct
Subsidy
Subsidy
for Hiring
for Hiring
AAdirect
subsidy
for for
hiring
would
bewould
a one-time
direct
A direct
subsidy
subsidy
for
hiring
hiring
would
be be
a a
payment to or lower payroll taxes for all firms
one-time
one-time
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to or
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or lower
payroll
payroll
when hiring a worker, regardless of enrollment
taxes
taxes
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all firms
when
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hiring
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Rhode Island Unemployment: Is There Labor Market Mismatch?
workers from workforce development programs,
and thus may not deliver the most effective return per dollar spent. A more direct wage subsidy
– either through a reduction in the payroll taxes
paid by firms or a direct subsidy for hiring – would
have similar effects on employment but would be
more transparent and perhaps more cost-effective.
As an alternative or complement to publiclyfunded programs, the government can try to shift
the responsibility for training workers onto private firms. When unemployment is low and labor
markets are tighter, firms often invest their own
resources in educating and training workers in the
skills they need. Government programs that entail
the hiring of workers, like public infrastructure
projects, boost the demand for labor. By making
the labor market tighter, these programs also indirectly encourage private firms to hire and train
workers.
State governments that choose to invest in education and workforce development should also keep
in mind that, while these programs deliver clear
benefits to workers, states are not always able to
keep the benefits within their borders. After receiving education or training, workers may simply
leave the state and migrate to areas where jobs are
in greater supply. This is an important limitation
of policies that seek to reduce local unemployment solely by focusing on workforce training and
development.
Moving Rhode Island Forward
My analysis indicates that labor market mismatch is unlikely to account for
most of the rise in unemployment experienced in Rhode Island during and
after the Great Recession. However, this does not rule out a role for labor
market mismatch over the long run. A steady decline in manufacturing and
comparatively low levels of educational attainment may account for some of
the unemployment experienced by Rhode Island in the last 30 years.
Though policies aimed at addressing labor market mismatch, like workforce
development and education programs, benefit individual workers by helping
prepare them for jobs, these programs are not a panacea for what ails Rhode
Island. Solutions must also focus on the business environment in Rhode
Island, informed by research to help identify the obstacles that prevent
businesses – particularly new and young firms – from expansion and hiring.
Furthermore, programs to reduce the burden of debts incurred during the
housing boom and bust may help restore consumer demand and get Rhode
Island households spending again.
The Collaborative | March 2015
8
WILL EXPANDING MEDICAID HELP THE ECONOMY?
ENDNOTES
1.
The historical data on job openings needed to depict a Beveridge curve is only publicly available for the U.S. as a whole,
not for individual states. Thus a Beveridge curve for Rhode Island is not included in this report.
2.
Aysegul Sahin, Joseph Song, Giorgio Topa, and Giovanni L. Violante (2014) “Mismatch Unemployment,” American
Economic Review, 104(11): 3529-3564.
3.
Atif Mian and Amir Sufi (2014) “What Explains the 2007-2009 Drop in Employment?” Econometrica, 82(6): 2197–2223.
4.
Benjamin H. Harris, Brad Hershbein, and Melissa S. Kearney (2014) “A Tale of Two Jobs Gaps: Private-Sector Recovery
and Public-Sector Stagnation,” Brookings on Job Numbers, Washington, DC: Brookings Institution.
5.
Marcus Hagedorn, Fatih Karahan, Iourii Manovskii, and Kurt Mitman (2015) “Unemployment Benefits and
Unemployment in the Great Recession: The Role of Macro Effects” Working Paper no. 19499, National Bureau of
Economic Research.
6.
Kathryn J. Byun (2010) “The U.S. Housing Bubble and Bust: Impacts On Employment,” Monthly Labor Review,
Washington, DC: U.S. Bureau of Labor Statistics.
7.
Steven J. Davis, R. Jason Faberman, and John C. Haltiwanger (2012) “Recruiting Intensity During and After the Great
Recession: National and Industry Evidence,” Working Paper no. 17782, National Bureau of Economic Research. Neil
Mehrotra and Dmitriy Sergeyev (2013) “Sectoral Shocks, Shifts in the Beveridge Curve and Monetary Policy,” Ph.D.
dissertation, Columbia University.
8.
Steven J. Davis, R. Jason Faberman, and John C. Haltiwanger (2013) “The Establishment-Level Behavior of Vacancies
and Hiring,” Quarterly Journal of Economics, 128(2).
9.
Neil Mehrotra and Dmitriy Sergeyev (2015) “Financial Shocks and Job Flows,” working paper.
10. Michael W. L. Elsby, Bart Hobijn, and Aysegul Sahin (2010) “The Labor Market in the Great Recession,” Brookings
Papers on Economic Activity, Washington, DC: Brookings Institution.
11. Caroline M. Francis (2013) “What We Know About Workforce Development for Low-Income Workers: Evidence,
Background and Ideas for the Future,” National Poverty Center Working Paper Series No. 13-09, Ann Arbor, MI:
University of Michigan, National Poverty Center.
12. For more on manufacturing in Rhode Island, see: Edi Tebaldi (2014) “Manufacturing, Innovation, & Economic Growth:
Challenges For Rhode Island And The Country,” Footnote, February 7.
The Collaborative was developed in response to calls from the Governor’s office,
public officials, and community leaders to leverage the research capacity of the
state’s 11 colleges and universities and to provide non-partisan research for
informed economic policy decisions.
50 Park Row West, Suite 100
Providence, RI 02903
www.collaborativeri.org
Amber Caulkins
Program Director
[email protected]
401.588.1792
Following the Make It Happen RI economic development summit, the Rhode
Island Foundation committed funding for the creation of The Collaborative. As a
proactive community and philanthropic leader, the Foundation recognized The
Collaborative as an opportunity for public and private sectors to work together
to improve the quality of life for all Rhode Island residents. In FY 2013, the State
of Rhode Island matched the Foundation’s funding, viewing The Collaborative as
a cost-effective approach to leverage the talent and resources in the state for
the development of sustainable economic policy.
Rhode Island’s 11 colleges and universities agreed to partner with The
Collaborative, and the presidents from each institution formed the Leadership
Team. A Panel of Policy Leaders was appointed by the Governor’s office,
the Rhode Island House of Representatives, and the Rhode Island Senate
to represent both the executive branch and the legislative branch of state
government. This panel is responsible for coming to consensus on research
areas of importance to Rhode Island.
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2015
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2015
REGIONAL COMPETITIVENESS