have often called structural unemployment, a situation in which jobs are actually available but unemployed workers cannot be hired because they lack the necessary skills, reside in the wrong area, and the like. (For a very recent description of "structural unemployment" in an introductory text, see Case and Fair, 1996.)

But unemployment is not the only possible result of such a situation. To an economist, mismatch suggests a gap between the demand and supply sides of the labor market—that is, between employers and prospective employees—terms of some particular characteristic. Thus, a skills mismatch might arise because the demand for workers with certain skills (such as higher education) has increased more rapidly than the supply of such workers.

Figure 2.1A illustrates the results of such a shift in demand from less educated workers to more educated ones. As the figure shows, the demand shift should result in both lower wages and lower employment among the less educated in the short run (and the opposite for the more educated), with the exact effects depending on the elasticity of the labor supply—that is, the responsiveness of the supply of workers to wage levels.1 The lower this is the smaller will be the loss of employment and the greater the loss of wages for this group.2

Thus, widening wage and/or employment gaps between education groups could be interpreted as a sign that relative demands have shifted between them and that some degree of mismatch exists. Widening gaps in earnings or employment between specific demographic groups with more or less education (such as blacks and whites) could also result, and, even within a group whose members have comparable amounts of education, widening gaps for other dimensions of skills (such as those measured by test scores) could also indicate relative shifts in labor demand.

This analysis is strictly short run in nature. The new and higher wage gap between education groups would imply a higher return to investment in that particular skill, which should lead to greater enrollment in higher education (Becker, 1975). In the long run the relative supply of educated workers should gradually shift out while the relative supply of less educated workers should diminish (Figure 2.1B). This will, in turn, reduce the wage gaps between the two groups.


This analysis assumes that the market was in equilibrium to begin with and that it will be so after the demand shifts occur. If wages are rigid, especially in the downward direction for less educated workers, the result would be somewhat less reduction in wages and somewhat more loss of employment (and a rise in unemployment) among less educated workers, but the overall implications of the analysis still hold.


The elasticity of the labor supply is reflected in the shape of the labor supply curve; the steeper the curve, the lower this elasticity is. A low elasticity implies that people will choose to work regardless of the wage level, while a higher elasticity implies that people will choose not to work at low wage levels.

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