Occupational Shortage and Labor Market Adjustments: A Theory of Islands

Abstract

Human Resources officers report occupational shortage to be the main cause of unfilled vacancies. Yet, it is not clear whether these are empty complaints or actually lead to effective wage and employment adjustments over time. By crossing data from the UK Employer Skill Survey with the UK Labor Force Survey, we show that shortage only leads to wage and employment adjustments for non-routine occupations in England, while no such adjustment occurs for routine occupations. This result is robust to several empirical specifications and varying levels of aggregation. Moreover, firms facing routine occupation shortage are more likely to outsource these vacancies, instead of raising wages or increasing recruitment intensity. In all, these results are consistent with the phenomenon of job polarization and the secular decline of the routine sector. To explore the likely mechanisms at play, we construct a stylized model of search and matching, where labor market islands are characterized by location and occupation types. We demonstrate how, when faced with local labor market shocks, wages in the skill-intensive non-routine sector increase more in response to shortage, thereby raising employment and mitigating the initial shortage, at the expense of the routine sector.