August 3, 2012

Skill mismatch?

Right now, US corporations are sitting on lots of savings and not hiring, or only hiring very slowly. There are several explanations that have been floating around:
  • Businesses are afraid to hire workers because they are worried about future economic uncertainty (probably due to possible government intervention)
  • Businesses are unable to find workers that have the skills they need
  • There is not enough demand in the economy
Each of these explanations of the problem promts a different solution, and unsurprisingly one tends to see people on different sides of the political spectrum arguing for explanations that match their political tendencies.

One thing very few people are doing is blaming the companies themselves. Economists typically view firms as black boxes that respond to profit-maximizing incentives (like payroll taxes) and shouldn't be seen as individually responsible for macro problems like unemployment. Conservatives are unlikely to fault corporate behavior since they are seen as the good guys. Even leftists and progressives view corporate behavior more as a product of the capitalist system or poor regulation, respectively.

...which is why I found this interview (via the excellent Ask A Manager blog) with a Wharton business school professor interesting: it opens the black box and looks at issues of corporate management practices and culture that impact hiring decisions. Definitely worth reading.

A snippet:
What’s really happening is [employers are] just not able to hire, but you don’t know why that is, right? And the skills-gap story is their diagnosis. It’s basically saying there’s nobody out there, when in fact, it turns out it’s typically the case that employers’ requirements are crazy; they’re not paying enough, or their applicant screening is so rigid that nobody gets through.
A short rant: economics and political economy are tools to answer questions. They make assumptions and simplifications in the hope of reducing incoherent complexity to something coherent. This is great, but in the attempt to establish quantitative rigor, to prove something with numbers, all too often the actual causal chain is glossed over. People don't stop to ask what the micro-level interactions and relationships are that actually create the data at either end of the relationship.

I am not trying to be critical of any particular economist or economic technique. Rather, I am trying to point out that the methods used by economics tend to encourage this kind of glossing-over of minutae. Big data is great at showing trends and connections but each data point is only a snapshot of reality, and a highly-simplified snapshot at that. It is important to do as much as we can, using other methods of inquiry, if we are to puzzle out what is really going on between the data points--when our shutter is closed.

Big data can also be revealing of minutae, but you have to know what minutae to look at--and how to measure them. Rereading part of the interview, the professor is using data to show that simplistic explanations are wrong. But he only knows what data to look at because he's aware of the internal dynamics of firms; he has a firm grasp of the entire causal chain, and does not assume away half of the links.

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