Sunday, April 6, 2014

Do We Have a Shortage of Skilled Workers? Yes and No

One often hears terms like "skills mismatch" and "skilled worker shortage" as pundits attempt to explain declining employment rates and persistent high unemployment rates. These pronouncements are usually uttered in a context that is politically tinted and based more on anecdotal reports than on hard data. Two recent articles posted by the Economic Policy Institute attempt to determine whether "skills mismatch" is a significant factor in our economy.

The first is by Heidi Shierholz: Is There Really a Shortage of Skilled Workers? Her thesis is as follows:

"….if today’s high unemployment were a problem of mismatches or a skills shortage, we would expect to find some types of workers or sectors or occupations of meaningful size now facing tight labor markets relative to before the recession started. The "signature" of skills mismatch is shortages relative to 2007 in some consequentially-sized groups of workers."

Shierholz examines the change in unemployment rate between 2007 and 2012 by occupation and finds no evidence that any job category is experiencing a shortage.

"….the unemployment rate in 2012 in all occupations is higher than it was before the recession. In every occupational category demand for workers is lower than it was five years ago. The signature of a skills mismatch – workers in some occupations experiencing tight labor markets relative to 2007 – is plainly missing."

She also provides a chart of the number of unemployed versus number of job openings by industry and finds that the" number of unemployed vastly outnumber job openings across the board."

Shierholz then turns to the data on hours worked in each occupational category.

"Another way to approach the question of whether or not the labor market is suffering from skills mismatch is to note that if employers really did have enough demand for their goods and services to need to hire new people but couldn’t find suitable workers, they would be ramping up the hours of the workers they have….Only in legal occupations are hours meaningfully longer than they were before the recession began, though the average workweek in legal occupations increased by less than one percent in those five years. Given that in almost all occupations the average weekly hours of existing workers are lower now than they were before the recession started, it is difficult to see how employers are seeing demand go unmet because they can’t find people who can do the work."

Finally, the change in wages in each of the occupational categories is tallied.

"In no occupation is there any hint of wages being bid up in a way that would indicate tight labor markets or labor shortages. In fact, in no occupation have average wages even kept pace with overall productivity growth over this period. This pattern of productivity growth outstripping wage growth across the board is a signature of weak demand for workers caused by shortage of demand for goods and services, not skills mismatch."

The approach of looking at the economy as a whole allows Shierholz to conclude that any shortage of skilled workers is a small effect and cannot be considered important relative to the true economic concern which is a basic lack of demand for workers.

It only takes one employer to complain about an inability to find trained workers to make front page headlines and have conservative pundits (pundits who are politically conservative) announce that the problem lies not in a weak economy but in the incompetence of our workers.

Most of the indications of shortages seem to emanate from the manufacturing sector. Paul Osterman and Andrew Weaver examine such claims in their article Why Claims of Skill Shortages in Manufacturing Are Overblown. The authors and their colleagues surveyed a representative set of manufacturers having ten or more employees. This effort was part of the MIT Production in the Innovation Economy (PIE) project. Almost a thousand companies participated.

The results regarding worker shortages are summarized in this chart:

This leads the authors to conclude:

"The strong majority of manufacturing establishments simply do not have a problem recruiting the employees that they need, and this should be no surprise given the current state of the job market and wage trends. Nearly 65 percent of establishments report they have no vacancies whatsoever, and 76.3 percent report they have no long-term vacancies. There is, however, a subset of establishments that report problems in the form of extended vacancies. Overall, about 24 percent of establishments report some level of long-term vacancy, while about 16 percent report long-term vacancies equal to more than 5 percent of their core workforce."

Given this data, it would be misleading to claim that the manufacturing sector is being hampered by a shortage of skilled workers. It would also be misleading to claim that there was no need for more skilled workers. What conclusions can be drawn?

Some additional insight is provided by an article in Bloomberg Businessweek by Matthew Philips: Welders, America Needs You.

Welding metal parts is apparently a skill that has not gone away; rather, it has been transformed into a more demanding skill. Unfortunately, no one seemed to be paying attention so it became one of those areas where companies have been hampered by of a lack of workers.

"For the better part of the past 30 years, welding was seen as a dead-end job. When the manufacturing sector began contracting in the 1980s, so did the demand for people who worked with metal. In 1988 there were 570,000 welders in the U.S., according to data kept by the Bureau of Labor Statistics. By 2012, there were fewer than 360,000."

"The assembly line jobs that used to employ most welders have largely been outsourced or automated. Today, the focus is quality, not quantity. Welders work on made-to-order pieces of fabricated metal (metal cut into a certain shape) and alloys, producing high-value pieces of equipment for any industry from automobiles to aerospace."

The economy has been left with population of welders with an average age of 55.

"The American Welding Society estimates that by 2020 there will be a shortage of 290,000 professionals, including inspectors, engineers, and teachers. ‘We’re dealing with a lost generation,’ says Gardner Carrick, vice president for strategic initiatives at the Manufacturing Institute, the workforce development arm of the National Association of Manufacturers. ‘For 20 years we stopped feeding young people into the trades, and now we’re scrambling to catch up’."

Philips describes the training required to become a competent welder for today’s industries.

"The Hobart Institute of Welding Technology has been around since 1930 and is considered one of the top national programs in the trade. To get in, you need a high school diploma or a GED, plus about $25,000 to cover the cost of tuition, books, and living expenses. For nine months, students learn how to weld structural steel and pipe, spending more than 1,000 hours under a hood practicing the art of fusing different pieces of metal. As they advance, they learn to work with more complicated alloys, such as aluminum, titanium, and stainless steel, always striving for that perfect weld that makes the metal stronger. ‘A nice weld is a work of art,’ says Andre Odermatt, Hobart’s president."

"Each year, about 300 students graduate from the school. Eighty-three percent have a job when they leave. The average pay for a new Hobart grad is about $17 an hour, or $36,000 a year. Some students can expect to make a lot more, particularly those learning trigonometry in Hobart’s advanced pipe-layout class. The math will come in handy when they’re welding pipeline along rough terrain or running pipe into a refinery or pump station at unusual angles."

Philips compares these economic prospects with those of college graduates with a four-year degree.

"….the average salary for 25- to 34-year-olds with bachelor’s degrees is $46,900, according to 2012 data from the National Center for Education Statistics."

One should be able to assume that many high school graduates would see nine months of training for a hands-on career as a more desirable option than a four year tour at a college. Not many have been provided the opportunity to consider that choice. Our school system has become devoted to producing college graduates. Vocational training has been almost nonexistent.

Fortunately, vocational training is making a comeback as an educational option. A few school systems are attempting to reintegrate the notion. However, the type of training that workers need cannot be provided solely in an academic environment. The needed qualifications and equipment can only be effectively provided by the interested industries. Philips indicates that some companies are beginning to recognize their responsibility and are collaborating with schools in training new workers.

"Caterpillar is hiring several hundred welders over the next couple of years to work in two plants it’s building in North Carolina and Georgia. The company partners with local high schools and community colleges, donating factory equipment and even helping design curriculums to steer young people toward manufacturing and overcome the stigma of working with your hands. ‘It’s as much about fixing the perception gap as it is the skills gap,’ says Korey Coon, a human resources manager at Caterpillar."

As Shierholz concludes, a skills shortage may not be producing a huge effect on our economic growth, but each unemployed person, each job unfilled, and each economic opportunity missed should be considered a tragedy.

Many relegate manufacturing to an obsolescent niche in our economy. They ignore the fact that, as Osterman and Weaver point out,

"….the manufacturing sector remains of interest due to its size and characteristics. It accounts for 12 percent of GDP, and it is responsible for about 70 percent of industry research and development spending…."

A nation that outsources its manufacturing and the associated research and development will soon become a niche nation.

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