In a very tight labor market, such as the one experienced by the United States during the mid- to late- 1990s, there seem to be ample numbers of jobs available for workers who want them. Yet, while there is no shortage of jobs facing workers in the aggregate, there may be some workers with very poor skills and other labor market problems that prevent them from becoming easily employed, especially in the short-term.
As welfare recipients and other unskilled workers enter the low-wage labor market, many for the first time, what characteristics and behaviors of employers will they encounter? Will workers have the skills and personal characteristics that employers seek? Will some face discrimination due to their race or gender? Will they experience other difficulties gaining access to certain jobs, such as those located in distant suburbs, because of problems with transportation and information? What are the implications of these difficulties for their employment/earnings prospects, and what policies might be needed to overcome these problems?
This paper considers some evidence on the characteristics of the demand side of the labor market that unskilled workers face, and on the potential mismatches that might result because their own characteristics are not those sought by employers. It then considers the implications of this evidence for a variety of policy approaches.
What Is Mismatch?
The issues described above are generally associated with the problems of labor market "mismatch," or imbalances, between the characteristics and behaviors of employers and jobs on the demand side of the labor market and those of workers on the supply side.(1) Mismatches in the labor market can occur along a variety of dimensions, such as skills, geographic location (i.e., "spatial mismatch"), and even race. They often develop as a result of two factors: (1) Labor demand "shifts" away from unskilled workers, or those located in inner-city neighborhoods, for a variety of reasons (e.g., technological change, immigration, and international trade or high crime rates and taxes in the city); and (2) Adjustments occur too slowly by specific groups on the supply side of the market in response to these changes.
When demand shifts occur in labor markets, they create incentives for workers to make a variety of adjustments. For instance, a shift in demand toward more highly skilled labor increases the gap in wages between more-educated and less-educated workers, which should induce more workers to enroll in school and achieve higher educational levels (as emphasized in the "human capital" model). Similarly, when employers relocate from central city to suburban areas, workers can adjust either by moving to these areas or by commuting to jobs located there.
But some of these adjustments take many years, and particular groups might face high costs or other barriers in making the adjustments. For instance, young people from families with very low incomes might not be able to afford additional schooling or, because of the poor quality of schools in their neighborhoods, might not have the academic skills to pursue it. Inner-city minorities, especially African Americans, might be constrained from moving to the suburbs by housing market discrimination or high residential costs (where the latter might partially result from exclusionary zoning practices); and they might not commute to these areas because of lack of automobile ownership and difficulties with public transit, as well as a lack of information or support networks in these areas. Such "mismatch" problems might be exacerbated by discrimination among employers, which some economists had once assumed would disappear in competitive labor and product markets, but which actually appear to persist over time.(2)
Taken together, these labor market factors could result in low wages and/or employment for minorities and other unskilled workers over extended periods of time. An imbalance between supply and demand in the labor market should result only in lower wages for the disadvantaged group if wages are flexible and markets are generally in "equilibrium." But if labor market rigidities (caused, for example, by legal minimum wages or employer wage policies) keep wages from adjusting, or if the disadvantaged workers choose to "queue" for the higher-wage jobs rather than accept lower-wage ones, then mismatches could result in high unemployment rates for these groups as well. Even in equilibrium, low market wages might result in labor market withdrawals and high rates of nonemployment (rather than unemployment) for the disadvantaged group.