[2021-2] Assessment of Labor Market Mismatch Since the COVID-19 Outbreak

Macro Economy
Labor Market Mismatch COVID-19 Unemployment Job Vacancy Industry
Research Department(02-759-4172)

In 2020, domestic labor supply and demand conditions worsened significantly amid a large rise in the number of the unemployed and a reduction in corporate recruitment due to the economic contraction stemming from the coronavirus shock. In addition, the employment shock has differed from industry to industry, meaning that supply and demand imbalances among sectors are highly likely to continue for some time. Against this backdrop, in an effort to measure labor supply and demand imbalances among industries, this paper calculates a labor market mismatch index using unemployment and job vacancy data by industry, and estimates mismatch conditions since the pandemic and the resulting economic losses.

According to the results of the estimation of the labor market mismatch index, the industry mismatch index has risen sharply since the pandemic. This is mainly due to two factors. First, as COVID-19 has unevenly affected the business conditions of individual industries, the gap between job openings and applications has widened greatly, with labor supply and demand conditions showing differentiation among industries. Second, matching efficiency, the measurement of how efficiently job openings are matched with applications in the job market, has been declining since 2020. This appears to be mainly attributable to a sharp increase in the number of people who are discouraged from searching for work amid the ongoing coronavirus shock. It is still too early to judge that mismatch has worsened structurally, since the employment shock from the pandemic is still continuing. However, in light of the experience during the global financial crisis when the job mismatch index rose sharply and then remained high for a considerable period of time, we cannot rule out the possibility that the current employment shock will become firmly entrenched as a structural problem.

Labor market mismatch has negative impacts, such as a rising unemployment rate, sluggish recruitment, and falling labor productivity, and such impacts have become greater since the pandemic. Last year, the unemployment rate stemming from mismatch increased considerably, and as a result, the fall in the job-finding rate increased. In addition, it is assessed that there is considerable inefficiency in labor allocation among industries and the consequent losses in labor productivity increased greatly to 1.9% in 2020.

If labor market mismatch becomes firmly entrenched, the employment recovery could be delayed for a considerable period of time, due for instance to a scarring effect, and losses in labor productivity stemming from inefficient labor allocation could increase further. To mitigate these effects, information asymmetry between firms and job seekers should be eased by facilitating public and private employment support services, and labor restructuring among industries should be induced by strengthening job training particularly in understaffed industries. It is also necessary to enhance labor productivity.

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