Labour Market Matters - April 2014

Examples of educational mismatch and overqualifcation in the labour market can often be found in the same office building – the clerical worker with a bachelor’s degree reporting to a manager with a high school education – as an example. Some have argued that mismatch in general is a result of poor economic conditions; however, a paper entitled “Labor Market Conditions, Skill Requirements and Education Mismatch†(CLSRN Working Paper no.134) by CLSRN affiliate Fraser Summerfield (University of Guelph) provides evidence that the pattern of increased overqualification during economic downturns is partially due to relative changes in the type of jobs available at these times. Unemployment Insurance (UI) helps individuals transition through difficult economic situations such as periods of unemployment, and underemployment. While UI provides insurance to households by helping them “smooth consumption†during a period of unemployment, studies have found evidence of moral hazard– raising UI benefits encourages longer unemployment spells. However, the previous literature has not distinguished between changes in benefits when labour market conditions are good, and changes in benefits when labour market conditions are poor. If either the consumption smoothing benefit or the moral hazard cost of UI depends on labour market conditions, this may imply that optimal UI benefits should respond to shifts in labour demand. A study entitled “Should Unemployment Insurance vary with the Unemployment Rate? Theory and Evidence†(CLSRN Working Paper no. 104) by CLSRN affiliates Kory Kroft (University of Toronto) and Matthew Notowidigdo (Booth School of Business, University of Chicago) examines how optimal UI benefits vary over the course of the business cycle by estimating how the moral hazard cost and the consumption smoothing benefit of UI vary with the unemployment rate.