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  • Is There Really a Skills Gap?

    February 01, 2018 | By Edwin Koc

    Trends

    TAGS: STEM, trends and predictions, journal

    NACE Journal, February 2018

    The U.S. economy is apparently full of paradoxes. The unemployment rate is at a 17-year low at 4.1 percent, which, by traditional measures, would mean that the economy is operating at full capacity. Yet, there are well-placed observers, such as Robert Kaplan, president of the Federal Reserve Bank of Dallas, that worry that economic growth is being impeded by a work force that lacks sufficient skills to allow businesses to grow.1 As an example, he cited a report from the National Federation of Independent Businesses (NFIB) that 45 percent of small businesses were unable to find qualified applicants to fill job openings in the first quarter of 2017. Employers with job openings in “middle-class” jobs (e.g. nurses, technicians, network support specialists) have consistently complained of a shortage of workers available to fill these openings.

    Since January 2013, approximately 10.6 million jobs have been added to the economy. Of these, 71 percent have gone to individuals with a college degree.

    This has become an issue for higher education for two reasons. One, while these “middle-class” jobs were filled in the past more frequently than not by those with a high school education or a modicum of post-secondary education, that is no longer the case. These are now jobs for which employers are nearly universally demanding a bachelor’s degree from a candidate. As evidence of this is the fact that almost all of the new jobs created since the recession of 2008 have gone to college graduates.

    Between January 2008 and January 2013, millions of jobs were lost during the recession and then recovered in the modest post-recession recovery. The net change was a loss of approximately 300,000 jobs. While in total the net result was relatively flat, there was a significant change in the composition of those who held the jobs after the recession as compared with prior to the recession. At the end of this period, 4.4 million fewer jobs were held by individuals with less than a bachelor’s degree, while 4.3 million more job were held by graduates with at least a bachelor’s. Since January 2013, approximately 10.6 million jobs have been added to the economy. Of these, 71 percent have gone to individuals with a college degree compared with only 15 percent to individuals with some college but no degree and 14 percent to those with a high school diploma or less.2

    Two, the “skills gap” is frequently attributed to a failure of the U.S. education system, and more and more the part of the education system that is increasingly being blamed for the skills shortage is our nation’s colleges and universities. The linkage is seen by business and many of the nation’s state legislatures and governors, and is the “rationale” for modifications in the Higher Education Act proposed by the U.S. House of Representatives Education and Workforce Committee in its December 2017 PROSPER (Promoting Real Opportunity, Success, and Prosperity through Education Reform) Act. For example, a report from J.P. Morgan notes, “A recent Gallup-Lumina report found only 43 percent of Americans believe college graduates are prepared for success in the workforce, which matches the perception of employers, with only 33 percent of business leaders agreeing that educational institutions are graduating students with the skills and competencies their businesses need.”3

    In addition, governors from states such as Utah and North Carolina tout higher education legislation (the “66 by 2020” plan for Utah, “NCWorks” for North Carolina) linking higher education spending directly to work force needs.4

    Finally, Rep. Virginia Foxx (R-NC), chairwoman of the House Committee on Education and the Workforce, introduced H.R. 4508, the PROSPER Act, with the following statement: “Today, there are six million unfilled jobs in this country. Those jobs are unfilled because many employers have found that applicants lack the needed skills for those jobs. Today, Americans carry more than a trillion dollars in student debt. Somehow, despite the six types of federal student loans, nine repayment plans, eight forgiveness programs, and 32 deferment and forbearance options out there, college costs continue to surge, leaving millions of families paying the price for well-intentioned but poorly executed federal involvement. That is why this bill is before us today. No Americans—no matter their walk of life—can afford for us to simply reauthorize the Higher Education Act (HEA). They need us to reform it.”5

    The Extent of the “Skills Gap”

    The figure of 6 million job openings noted by Chairwoman Foxx, implying a significant shortage of skilled workers nationwide, is frequently quoted. To the extent that the shortage is caused or can be helped by changes in higher education suggests the need to institute public policies affecting higher education to effectuate the necessary changes. However, the figure of 6 million job openings needs to be fully understood before coming to the definitive conclusion that it represents a nationwide job skills problem.

    The figure of 6 million job openings comes from the Bureau of Labor Statistics’ (BLS) Job Openings and Labor Turnover Survey (JOLTS) report. BLS issues the survey results on a monthly basis, with the latest published report—the January 2018 issue—providing data as of November 2017. The latest job opening figure shows 5.9 million job openings in the United States, which is little changed from the previous 24 months. However, it is important to note that these job openings are not the result of new jobs coming online; further, the implication that these jobs go unfilled is highly misleading. The openings result from a variety of factors, most of which can be characterized as frictions in the labor market.

    The job openings are the result of:

    • 3.2 million workers quitting their current jobs;
    • 1.7 million workers losing their jobs as a result of a layoff or firing;
    • 0.3 million workers retiring, going on disability, or transferring to a different location within the same firm.

    That means 5.2 million job openings are the result of separations. This leaves approximately 700,000 unaccounted for, but presumably relatively new job openings.

    The 5.2 million job openings that result from separations are actually an indication of a healthy economy. As the above indicates, the majority of these openings are voluntary. They occur because an employee perceives a better opportunity in another firm or another location. The number of separations tends to increase as the economy improves and declines when the economy goes into recession. As Figure 1 shows, the number of job openings dropped significantly during 2008 and 2009—the period of the great recession. Since 2009, the number of openings has been climbing steadily, reaching around the 6 million mark in an economy where the stock market is at record highs and unemployment is at near-record lows.

    Job Openings: JOLTS, 2007-2017

    Nevertheless, if all these openings—whether they result from separations or from the creation of new positions—went unfilled, then that would present a serious problem for the economy. However, the same BLS job opening report also provides the count of new hires made each month: For November 2017, BLS reports that employers hired 5.5 million workers. This leaves approximately 400,000 job openings that went unfilled during November, which represents 0.2 percent of the U.S. labor market. It is important to note that the November 2017 figures are very consistent with the monthly data since January 2016. In fact, hires have exceeded separations, and the openings they create, for every month since 2010. A mass of jobs in the United States are not going unfilled; a relatively small fraction of job openings are taking relatively longer than the desired time to fill.6

    Other Evidence: National Wage Data

    The existence of a national skills shortage is also belied by national wage data. Under the rules of supply and demand, if demand is high and supply is low for a product, service, or a worker, then the price associated with that commodity/worker should significantly increase. Figure 2 shows the trend in nominal wage increases since November 2007. Since the recession, wage increases have held steady in the 2.0 percent to 2.5 percent range. There has been no significant jump, nor has there been a noticeable blip, in the trend suggesting a tremendous increase in demand not capable of being met with the supply of available workers.

    Nominal Wage Rate changes, 2007-2017

    The conclusions to be drawn from the large-scale national data tend to confirm or are themselves confirmed by more granular studies of the “skills gap.” For example, Osterman and Weaver found that less than a quarter of manufacturing firms had one or more production worker vacancies that lasted for three months. This was at a time when industry was claiming that three-fourths of employers were facing a shortage in skilled workers. Weaver, independently, explored the difficulty employers were having in hiring IT workers—a skill consistently cited as being in short supply. His analysis concluded that only 15 percent of IT hiring managers report extended vacancies in hiring skilled workers.8

    The Role of Higher Education

    Despite employer-based assessments, there is no credible supporting evidence of a national skills gap.

    So, where is the idea of a skills shortage coming from? After all, there have been a number of reputable surveys, such as the one from the NFIB cited earlier, in which employers either express displeasure with the skills of their current employees or cite the difficulty of hiring a new employee with the requisite skills for the open position.9 Is this a case of perception, rather than reality? Are employers discounting their own ability to close at least some of those gaps with training programs, as many organizations once did? Without further study, it is impossible to determine what employers are basing that assessment on.

    Despite the employer-based assessments, there is no credible supporting evidence of a national skills gap that would warrant a comprehensive national response in the way of radical reform of the American higher education system. There are, however, skills shortage issues that may be best met with a response that involves higher education institutions. There are a variety of reasons for why such a shortage may exist.

    One, the employer’s location may make it difficult to find the particular technical skills necessary for the enterprise. This is particularly true if the facility is located in a rural or even extra-urban location. For more than a decade, college graduates have gravitated to larger metropolitan areas, expanding the amount of human capital available for employers in these areas but limiting the human resources available to businesses attempting to operate outside of these areas.10 Locational issues may even impact a business operating within a major metropolitan area but where transportation issues may seriously constrain access to potential employees. Consider this example: A manufacturer in a more remote area of New York state’s Westchester County needs skilled technical employees. The general area contains many individuals with advanced educational credentials, but these individuals may not be attracted to or well versed in the specific aspects of the manufacturer’s jobs. 11

    Two, the employer may not be willing to pay the wage that would attract the workers with the necessary skills. The New York Times reported the story of a manufacturer outside of Milwaukee that had 25 positions open for skilled workers. The manufacturer received more than 1,000 applications for his positions. The company hired the 25 needed, but within a month fired 15 of the employees because of their dissatisfaction with their wages and the company’s work rules. The manufacturer’s pay rate for a skilled technician with an associate degree was $15 per hour. By comparison, the local McDonald’s was paying $14 per hour.12 In a globally competitive environment, it may be difficult to pay the wage necessary to attract individuals with the education and skills desired by an employer; however, that does not mean that those skills are missing.

    Three, jobs are rapidly changing in an ever-more technological world,  and the skills connected with those jobs need to be constantly updated. As Bessen notes, “Consider, for example, graphic designers. Until recently, almost all graphic designers designed for print. Then came the Internet and demand grew for web designers. Then came smartphones and demand grew for mobile designers. Designers had to keep up with new technologies and new standards that are still changing rapidly. A few years ago, they needed to know Flash; now they need to know HTML5 instead. New specialties emerged such as user-interaction specialists and information architects. At the same time, business models in publishing have changed rapidly.”13

    By some estimates, those who graduate with technical job-specific skills today will find those skills out of date within six years. These workers will need to be re-trained/re-schooled in a new set of job-specific skills.

    What is the best way to resolve these “skills gaps”? We’ve already indicated that broad national reform of the higher education system is likely to be inappropriate. The skills gap issue is predominantly localized and very job specific. The model that seems to work the best at resolving skills shortages is one in which an employer or group of employers link up with one or more institutions of higher learning to provide the immediate technical skill sets needed for the jobs at hand.

    Kaplan cites several examples of both businesses in the Dallas area working with educational institutions at all levels, and nonprofit organizations promoting employment for the disadvantaged in the Dallas area by collaborating with community colleges to develop skill sets necessary to meet the work force needs of specific employers in the region. Another example is the program Northrup Grumman and the University of Maryland have developed to fill the cybersecurity needs facing the corporation.14

    The potential “corporate-institutional” partnerships hold the promise of resolving the relatively narrow and localized—but nevertheless harmful—-skills gaps we currently face. They do so while minimizing the risk of entering into a major reform of our higher education system that may result in the development of programs that attract students with the promise of a specific job and a long-term career that could go unfulfilled as work force needs evolve.

    End Notes

    1 Robert Kaplan, “America Has to Close the Workforce Skills Gap,” BloombergView, April 12, 2017.

    2 Robert Shapiro, “The new economics of jobs is bad news for working-class Americans—and maybe for Trump,” Brookings, Fixgov, January 16, 2018.

    3 J.P. Morgan, “Bridging the skills gap: Higher Education’s Opportunity,” www.jpmorgan.com/global/cb/bridging-the-skills-gap.

    4 Tim Lemke, “Governors discuss attacking the skills gap,” U.S. Chamber of Commerce Foundation, June 12, 2014.

    5 U.S. House of Representatives, Committee on Education and the Workforce, “Opening Statement of Chairwoman Virginia Foxx (R-NC) Chairwoman, Committee on Education and the Workforce Markup of H.R. 4508, the Promoting Real Opportunity, Success, and Prosperity Through Education Reform (PROSPER) Act,” Washington, December 12, 2017.

    6 The job opening and hiring data can be found on the Job Opening and Labor Turnover Surveys section of Bureau of Labor Statistics website, www.BLS.gov/jlt/

    7 Economic Policy Institute, Nominal Wage Tracker.

    8 Andrew Weaver, “The Myth of the Skills Gap,” MIT Technology Review, August 25, 2017.

    9 See for example, Martha Laboissiere and Mona Mourshed, “Closing the Skills Gap: Creating workforce development programs that work for everyone,” McKinsey & Company, February 2017; and James Bessen, “Employers Aren’t Just Whining—the ‘Skills Gap’ Is Real,” Harvard Business Review, August 25, 2014.

    10 Christopher Wheeler, “Human Capital Growth in a Cross-section of U.S. Metropolitan Areas,” Federal Reserve Bank of St. Louis Review, March 1, 2006.

    11 See, Cait Murphy, “Is There Really a Skills Gap?” Inc. Magazine, April 2014 for the case study.

    12 Adam Davidson, “Skills Don’t Pay the Bills,” New York Times, November 20, 2012.

    13 Bessen, “Employers Aren’t Just Whining—the ‘Skills Gap’ Is Real.”

    14 Division of Research, University of Maryland, “Partnership Overview: UMD and Northrup Grumman.”

    Edwin Koc is director of research, public policy, and legislative issues at NACE. He can be reached at ekoc@naceweb.org.