There’s No “Skills Shortage”

There are plenty of reasons why higher education in the US needs to change. There are plenty of good reasons why community colleges in particular deserve greater investment. But the American Association of Community Colleges (AACC) gets it wrong when they claim

There is a skills gap in our country, causing employers to have unfilled positions and too
many Americans unable to find family wage supporting jobs.

Wrong. Wrong. Wrong.  This is a zombie economic idea.  It’s enormously disappointing when leaders in higher education can’t even get the basic economic thinking straight.  First, let’s just apply some basic economic thinking to it.  Although there are good heterodox reasons for not thinking of the labor market is not an ordinary market (i.e. it’s institutional, not transaction-based), but let’s roll with the idea since so many purveyors of the “skills shortage” myth act like it is.  The implication is that there are multiple “job markets” and that many, perhaps, most are suffering a “shortage”.

So what’s a “job market”.  A simple definition would identify the nexus of potential workers and potential employers in a specific geographic region in a particular occupation.  For example, “welders in metro Chicago” or “CNC machine operators in SE Michigan” or “software developers in Houston” would be examples. Now if there’s a “shortage” in one of these job markets, it means there are fewer sellers (smaller quantity offered, to be technical) and more buyers demanding a larger quantity at the going market price.  Now what happens in both theory and practice when a market has a persistent shortage? Anybody? Yes, the price rises.  Price goes up to attract more sellers and discourage buyers.  And the price keeps going up until equilibrium between quantity offered for sale and quantity demanded become equal and eliminate the shortage. If there were shortages in job markets we should see wages going up!  We should see companies tripping over themselves to offer more and better benefits.  But we don’t see that do we? Wages are stagnant across the board.  That’s because there really isn’t any widespread “skills shortage”.

What we have is business owners and managers reporting a shortage of highly skilled workers who would be willing to work for below-equilibrium and falling wages.  Remember as a nation we’ve drastically cut back on public funding of education and over the last generation  companies have drastically cut their spending on training and apprenticeships.  Those businesses now expect a free-ride from others.  They want workers to pay for their own education and training without paying the wages needed to make that human capital investment worthwhile.  If there were truly a skills shortage, not only would we see rising wages but we’d also see rising college enrolments as the rising market wage encouraged students to invest.  But we don’t see either rising wages or rising enrolments.  In fact for the last couple (few?) years, enrolments have been declining.

I’m not the only one pointing out how bad this zombie “skills shortage” myth is.  Paul Krugman pointed out recently:

    …this new EPI report is a useful reminder of the extent to which another doctrine that sounds serious retains a grip on discourse — namely, the notion that we have big problems because our work force lacks essential skills.

This is very much a zombie doctrine — that is, a doctrine that should be dead by now, having been repeatedly refuted by evidence, but just keeps on shambling along. EPI presents some very interesting evidence from a survey of manufacturing, but they’re hardly the first to show that the data don’t at all support the skills-shortage hypothesis.

But it’s not just Paul Krugman and progressives saying that the “skills shortage” idea is bunk, its leading conservative economists too, like Ed Lazear in this 2012 paper.   Even the Boston Consulting Group, who we might expect to take push the “skills shortage” idea since business owners like to push the idea, seems constrained to follow the data and their data show that:

So what accounts for the high and lingering unemployment?  The Economic Policy Institute looked at the whole issue and surveyed the literature and research in this January EPI report.

There is a sizeable literature on whether a skills mismatch is a driver of today’s weak jobs recovery, and the strong consensus is that the weak labor market recovery is not due to skills mismatch (or any other structural factors). Instead, it is due to weakness in aggregate demand.

That’s it.  We have a shortage of aggregate demand. We have a shortage of customers who spend. We have a shortage of spending. We don’t have a shortage of skills.

Higher education leaders who position their plans based on the false premise of a skills shortage do themselves and their institutions a dis-service, so we may have a shortage of higher education leaders willing to do their own critical thinking and rely on research instead of parroting politically popular zombie ideas. I can understand the temptation of many higher education leaders to use push the idea because they think it will help them get funding. But that’s a losing strategy. By embracing such zombie ideas, they destroy their own credibility with the faculty, the very people they need to implement the changes they’re advocating.

Below Market Wages Belies Claims of Structural Unemployment

Continuing what has turned into a short series on unemployment and structural unemployment in particular (see Monday and yesterday’s posts), let us look at some of the claims that structural unemployment.

First up, Brad Delong points us to Kevin Drum who tells the following story:

Kevin Drum:

Skilled Jobs Go Begging? Not Quite: The Wall Street Journal has a piece up this weekend about the difficulty that many companies are having hiring skilled workers in certain areas…. Here’s a description of some skilled job openings at Union Pacific railroad:

When the railroad had openings for diesel electricians earlier this year, it took [Ferrie] Bailey 10 hiring sessions to fill 24 jobs….Known as “installation technicians,” the workers are responsible for putting in and maintaining a sprawling network of cable, microwave relays and related equipment that enables the railroad to monitor 850 trains running daily along its 32,000 miles of track.

This doesn’t require a bachelor’s degree but demands technical skills gained either through an associates’ degree or four years of experience in electronics. And it is grueling work. Technicians have to climb 50-foot communications towers, clamber up utility poles and work outdoors through Wyoming winters and Kansas summers. They put in 10-hour days, in clusters of eight or ten days, and are routinely away from home more than half of each month.

….Standing at the front of the room, Ms. Bailey described the deal. As installation technicians, they would earn $21.64 an hour, or close to $48,000 a year for the railroad’s regular work schedule.

Then there’s this:

After a website job posting, Ms. Bailey initially drew 58 applicants. Of them, she deemed about two dozen sufficiently qualified so that she invited them to take a $25 aptitude test, at their own expense.

Let me get this straight. Union Pacific is supposedly desperate for candidates and can barely fill all their open positions. And yet, when they identify 24 qualified applicants, they aren’t even willing to maximize their hiring pool by ponying up $600 to make sure they all take the aptitude test. Then, later in the story, there’s this:

Ms. Bailey faced more stiff competition at a job fair the next day, because then she was up against several other employers looking for the same sort skilled people as she was. “Make $70,000 – $80,000 the first year with FULL BENEFITS,” read a sign at a booth right across from Ms. Bailey’s at the job fair, put on by the U.S. Army in Fort Carson, Colo., largely to help departing soldiers ease back to civilian life.

So here’s the story. Union Pacific is offering $48,000 per year for skilled, highly specialized, journeyman work that’s physically grueling and requires workers to be away from home about half of each month. The competition is offering 50% more, but not only is UP not willing to increase their starting wage, they’re so certain they can fill all their positions that they make qualified candidates pay for their own aptitude test. And despite all this, they filled all 24 of their positions in ten hiring sessions.

It doesn’t sound to me like there’s a huge shortage of qualified workers here. It sounds to me like Union Pacific is whining about the fact that it took them all of ten hiring sessions to fill their quota even though this is a really tough job and they aren’t paying market rates for workers. It’s as if they think that actually having to make a modest effort to attract job candidates is an inversion of the natural order or something. Speaking for myself, I think I’ll hold off on breaking out the violins.

Kevin has done an excellent job of taking the structural claims apart, but I’ll pile on anyway.  The claim that unemployment is structural is a claim that the labor market is segmented into different labor markets for jobs with different skills.  Further it asserts that there is no elasticity of supply between these different labor markets – in other words, if either have the skills or you don’t, there’s no on-the-job training or adaptable skills possible.  Finally, if unemployment is structural then we are saying that there’s a shortage (lack of supply) of workers in that skill category in that geographic area.  The Wall Street Journal is claiming that because Union Pacific cannot find enough willing sellers (workers) at the price (wage) Union Pacific is offering then there must be a shortage of qualified sellers.  Umm, how do I put this?  No.  Rather it’s evidence that the Union Pacific simply wants to pay below-market prices to labor.  That’s all.  Saying this is evidence of structural unemployment is like me claiming there’s a structural supply shortage of new automobiles because no dealer will sell me a new Porsche for $15,000.