Education and Unemployment

http://www.futureofcapitalism.com/2011/04/education-and-unemployment

Harvard Economist Edward Glaeser, whose book Triumph of the City we reviewed here earlier, has a new working paper out from the National Bureau of Economic Research. It is co-authored by Giacomo Ponzetto and Kristina Tobio and was partially funded by the government of Spain. It's full of interesting stuff, but what struck me as the most immediately newsworthy part was this: "while the recession impacted on all of America, it did not hit every place equally. In February 2010, the unemployment rate was over 20 percent in Merced, California, and over 15 percent in Detroit, Michigan. At the same time, the unemployment rate in Minneapolis, Minnesota, was 7.7 percent and in Boulder, Colorado, only 6.5 percent."

The economists say these variations have something to do with education levels: more education, less unemployment. But the relationship is even stronger than what a model based strictly on individual education would predict. Here is how the authors put it in the paper:

Education accounts for a greater decline in city unemployment than the national relationship between education and unemployment would imply. This provides another piece of evidence suggesting the existence of human capital spillovers.

Many interpretations of this fact are possible. It might be a coincidence that unemployment rates were unusually low in highly educated areas. People who live in educated areas could be more skilled than their years of schooling suggest. This in turn might reflect sorting, but also human capital spillovers that enhance unobserved skill levels (Glaeser 1999). The model in section 3 emphasized that skilled workers are both employers and employees. Hence the strong negative effect of education on unemployment may reflect the ability of more skilled entrepreneurs to find opportunity in a downturn. Of course, this explanation is now merely a hypothesis and further work will be needed to determine if it is correct.

To some degree, it's self-serving for Mr. Glaeser, a Harvard professor who earns his living in part by teaching, to claim that getting the education that he and his fellow professors grant will help prevent people from becoming unemployed. But that doesn't mean it's not true. And give Mr. Glaeser credit for distinguishing between education and skill, making a distinction that all too often eludes those in the education business. Finally, give him credit for broaching the idea that unemployment might have something to do with an unemployed person's lack of skills that might be attractive to an employer. This, too, is something that is often overlooked in the rush to blame unemployment on other factors, such as President Obama or the Chinese.

An example of the difference between education and skill is Stan Ovshinsky, who is the subject of a remarkable profile in a publication called Strategy and Business (Link via John Abrams's The Company We Keep blog):

Although his formal education ended with high school, he has written some 300 scientific papers; has more than 400 patents to his name for technologies that have improved daily life in myriad ways; and has been awarded dozens of honorary degrees, awards, and academic accolades. Now, at age 88, he has formed Ovshinsky Solar, a company with an audacious goal: to drive the unsubsidized cost of solar power below that of coal...

There's also a wonderful section in the profile of Mr. Ovshinsky about Sarbanes-Oxley:

He had always packed ECD's board with Nobel Prize winners and world-renowned thinkers in diverse fields whose attendance was clearly more related to mutual intellectual stimulation than legal and regulatory compliance. After the passage of the Sarbanes-Oxley Act in 2002, he had to take on additional outside directors with government-mandated skill sets, who then pressured him to emphasize quarterly earnings at the expense of experimentation. He was also forced to impose a reporting hierarchy on the company, which had never known titles or more than two levels of separation between the lowest-paid employee and the CEO. The culture of the company, which had always been collegial, became more conventionally corporate. Longtime colleagues began to leave, and Ovshinsky found himself dreading days filled with meetings and administrative duties.

by Ira Stoll  |  Apr 11, 2011 at 9:39 am Related Topics:  Capital Markets Regulation, China, Corporate Governance, Education, Energy, President Obama receive the latest by email: subscribe to the free futureofcapitalism.com mailing list