Trade Employment
Unemployment does not target all workers equally. Instead, unemployment is concentrated among particular demographic groups and among workers in specific sectors of the economy. Above all, a specific fact has been reported in several studies in labour economics: the unemployment rate is everywhere much higher for less educated workers. In 1998, in the USA, the unemployment rate of college graduates was only 1.8 percent, as compared to 4.0 percent for high school graduates, and 7.1 percent for high school dropouts (Ehrenberg & Smith, 2008).
The “unemployment gap” across education groups widened substantially in recent decades. Always in the USA, in 1970, the unemployment rate of high school dropouts exceeded that of college graduates by only 3.3 percentage points. By 1998, the gap was over 5 percentage points. Part of the increase in the unemployment differential across skill groups occurred during the 1980s, a decade that also witnessed a significant increase in the wage gap between skilled and unskilled workers (Cahuc and Zylberberg, 2004).
This significant benefit of education – lower risk of unemployment at higher educational levels – has been at the centre of a number of studies, whereby labour economists have attempted to spot and examine the reasons from which it originates. The essay will briefly review the main findings of the above-mentioned research. In order to achieve a better level of clarity it will be divided into two major areas.
Firstly, a microeconomic view, based largely on the pivotal work by Jacob Mincer “Education and Unemployment” (1991), will be presented. Secondly, I will focus on the macroeconomic analysis of the issue; the two most important works I will make use of in this second section are “Globalization and the Rise in Labour Market Inequalities” by Adrian Wood (1998), and “The Assessment: Globalization and Labour Market Adjustment” by David Greenway and Douglas Nelson (2000).
On the microeconomic side, the analysis is facilitated by a decomposition of the unemployment rate in two parts: the unemployment incidence, namely the probability of leaving employment, and the duration of unemployment, that is the probability of leaving unemployment (Mincer, 1991). The first thing to notice, as underlined by Mincer and others, is that duration of unemployment is a relatively minor aspect of the educational unemployment differentials. Previous research (Ashenfelter, 1979) show that incidence of unemployment is 170% greater, but duration only 30% greater, in the least educated compared to most educated workers.
A first reason why education implies lower unemployment rates lies in the positive relation between education and on-the-job training; the latter, in turn, clearly negatively related with unemployment (Mincer, 1991). But why do more educated workers engage in more on-the-job training? The logical answer depends upon the fact that more educated individuals have greater learning ability and can acquire human capital at lesser costs. Hence, they will invest more in all forms of human capital, including education and job training. Moreover, for similar reasons, it must be noticed that education enhances the productivity of job training at work.
Another reason regards the negative relation between turnover (which is fundamental in our analysis because it is an important component of unemployment incidence) and on-the-job training. In this case, skill specificity is the central concept. Training which enhances skills and productivity in the firm is not fully transferable to other jobs in other firms. As a result, workers who acquire large volumes of training on the job are less likely to move from one firm to another. Likewise, employers are less likely to lay off such workers if they share the costs and returns to training (Ehrenberg & Smith, 2008). We can conclude by stating that, due to the previously examined positive relation education-on the job training, there is a comparable negative correlation between education and turnover.
In addition, Mincer (1991) highlights the influence of education on labour mobility. In his opinion, a possible explanation for this is that firms with high fixed labour costs (i.e. costs of screening, hiring, fringes etc.) will aim to cut these costs by reducing turnover. To achieve this objective, they will select more productive, capable and stable workers. Hence, in substituting quality for quantity of employment, such firms tend to hire a larger proportion of better-educated workers (Mincer, 1991). Yet, another possibility can simply be that more educated individuals are more efficient in job matching. In sum, more educated workers engage in lesser job mobility, especially in local markets. Nevertheless, there is an exception: geographic mobility is greater for better-educated workers.
Now, in order to thoroughly explain the lesser incidence of unemployment of educated workers and the somewhat lesser duration of their unemployment, I will shift the focus on job search behaviour of workers and hiring effort of firms, and I will concentrate more on the situation of job changers. Firstly, it is necessary to realize that job search of workers takes place both while employed and while unemployed, and that the more educated are more likely to search on the job rather than off the job. The principal reason for this is that, for better-educated workers, the cost of off the job search is relatively higher than that of on the job search (mainly because of larger forgone earnings) (Mincer, 1991). Consequently, this deeper search results in a smaller probability of unemployment.
A further explanation is that better-educated workers are also more efficient in acquiring and processing job search information, particularly if they are more likely to receive advance notices of layoff (Ehrenberg & Smith, 2008). As far as the firms are concerned, they will search with greater intensity for more educated workers, because the costs of unfilled vacancies for skilled jobs, in term of forgone production, are clearly higher (Mincer, 1991).
All the above-discussed reasons explain the more successful on the job search of the more educated workers. However, efficiency of search is not the only factor affecting duration of search unemployment. Three other factors: opportunity costs, the rate at which the future is discounted, and the expected length of the payoff period, that is the duration of stay on the next job, have conflicting implications for the duration of search (The Handbook of Labour Economics, 1986).
This brief microeconomic analysis of the relation between education and unemployment does not certainly contain every aspect related to it. The problem is that, despite the immense literature available on the wage structure by education, much less research is devoted to mobility and unemployment aspects of education. Let us now move on to the macroeconomic view of the issue. The deteriorating position of low skilled relative to high skill labour, measured either in terms of a decline in the wages of the least qualified section relative to the most skilled, or in terms of the relative likelihood of their being in work, has recently stimulated a strong interest in globalization and labour markets. The attention has been mainly drawn to the roles of trade, in particular with low-wage economies, as a proxy of globalization, and technology, in particular skill-biased technical change.
An important factor-content analysis, emerging from the labour theorists’ traditional approach, deserves particular attention. A convenient approach, based on a partial equilibrium framework, involves assuming a downward-sloping demand for labour and a vertical supply curve. The labour content of trade can be added to domestic supply, thus shifting the supply curve and permitting identification of the effect of trade on the wage (Greenway and Nelson, 2000). An important proponent of this method is Wood, who published in 1994 the book “North-South Trade, Employment and Inequality: Changing Fortunes in a Skill-driven World”, considered a primary stimulus to research.
A further prominent work is the one by Sachs and Shatz (1994), who present one of the most detailed factor-content studies of trade, disaggregating by sector and trading partner. Nevertheless, the initial response by trade economists to this approach was overwhelmingly negative as, in a competitive environment (in primis, the Heckscher-Ohlin-Samuelson type), factor-prices can change only if commodity prices change (Greenway and Nelson, 2000). These studies are directed to the wage skill premium, but they can be similarly referred to the unemployment skill gap.
