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You likely have seen or heard about all of the US job openings that are unfilled due to “the skills gap.” This is despite the unemployment rate being in the ~8% to ~20% depending on which metric is used.

One explanation offered by economists is that qualified workers are NOT able to relocate to where the jobs are open due to having “underwater” mortgages. They are tied to their current house.

A different explanation is that Americans are NOT willing to take a lower paying position compared to their previous job. They hold out for finding a job that pays the same as their old job.

A third explanation is that Americans are “lazy” and would rather collect from the government instead of going to work.

I am sure that each of these explanations is true to some extent, but I have always found the explanations too simplistic. Adam Davidson of Planet Money has an article in the New York Times that highlights the root cause IMO.[1] A brief excerpt:

Eric Isbister, the C.E.O. of GenMet, a metal-fabricating manufacturer outside Milwaukee, told me that he would hire as many skilled workers as show up at his door. Last year, he received 1,051 applications and found only 25 people who were qualified. He hired all of them, but soon had to fire 15. Part of Isbister’s pickiness, he says, comes from an avoidance of workers with experience in a “union-type job.” Isbister, after all, doesn’t abide by strict work rules and $30-an-hour salaries. At GenMet, the starting pay is $10 an hour. Those with an associate degree can make $15, which can rise to $18 an hour after several years of good performance. From what I understand, a new shift manager at a nearby McDonald’s can earn around $14 an hour.

The secret behind this skills gap is that it’s not a skills gap at all. I spoke to several other factory managers who also confessed that they had a hard time recruiting in-demand workers for $10-an-hour jobs. “It’s hard not to break out laughing,” says Mark Price, a labor economist at the Keystone Research Center, referring to manufacturers complaining about the shortage of skilled workers. “If there’s a skill shortage, there has to be rises in wages,” he says. “It’s basic economics.” After all, according to supply and demand, a shortage of workers with valuable skills should push wages up. Yet according to the Bureau of Labor Statistics, the number of skilled jobs has fallen and so have their wages.

I have thought this way for many years when I hear business managers complain about the skills gap. When I hear one of these managers voice that issue, I tell them that I can solve the problem in 30 seconds. All you have to do is raise the salary to $1 million per year. (The assumption is that most jobs currently pay less than $1 million per year.) The manager will always say that he cannot pay $1 million for that position. I then suggest they correct their statement to “there is a skills shortage willing to work at the low wages I want to pay.” The truth is that at some wage level, you can get as many workers as you want. It doesn’t make any difference what the job is. Yoda would shovel manure all day long for a high enough wage. (Don't laugh, you would too! It is just a matter of money.)

A corollary to this is well illustrated by the petroleum industry. You likely have heard about the skills shortage from those companies. I have heard that also. The question to ask the CEO is: how many workers did you LAYOFF when oil was $10 a barrel?” The answer is usually something along the lines of many or most. At that time, no student in their right mind would major in petroleum engineering in college. Many colleges shut down their departments due to a lack of interest. Fast forward 20 years later and the CEO’s all complain about a skills shortage. DID YOU EVER THINK ABOUT NOT LAYING OFF YOUR PETROLEUM ENGINEERS WITH AN EYE FOR THE LONG TERM?

It is easy to understand the case for a manufacturer that has global competition. Apple will NOT pay a single cent more to have an I whatever part made in the US compared to China.

That does NOT hold for US captive jobs, like nurses? Pretty tough to outsource US nursing jobs to China, although a significant fraction of US nurses are Filipinos.

All of this is very pertinent to the long term employment outlook for the US. If companies and prospective employees are NOT able to come to terms on wages, how will we lower the unemployment rate?

I recommend reading the short article.



[1] New York Times article: Skills Don’t Pay the Bills
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