Mismatch in Local Labor Markets: How Demand Shocks to Different Occupations Affect Less- or More-Educated Workers in Diverse Local Labor Markets

Abstract

This paper estimates the effects on local labor market outcomes (employment rates, real wages, real earnings) of local labor demand shocks to different types of occupations. Occupations are divided into three groups, “high, middle, and low,” with occupations differing in wages paid and education credentials required. Effects are considered on both workers with less than a four-year college degree and workers with a bachelor’s degree or higher. The strongest benefits for labor market outcomes come from demand shocks to “mid jobs.” Mid-job demand shocks particularly benefit less-educated workers. High-job demand shocks often hurt labor market outcomes for less-educated workers, in part because such shocks push up local prices. Low-job demand shocks sometimes improve labor market outcomes for less-educated workers, and sometimes damage labor market outcomes for more-educated workers. Estimated labor demand effects also vary in different types of local labor markets. For example, when baseline local labor market conditions are tight (high baseline employment rate), less-educated workers gain more in real earnings from low-demand shocks, and lose more in real earnings from high-demand shocks.