By: Jacinta Sherris

What America’s Growing Labor Shortage is telling us about Wages, Education, and the Future of American Workers

Globalization and technological change have suppressed wage growth for many middle and low income Americans over the past few decades. Up until 2013, wage growth for Americans was stagnant at 6%- a number unchanged since 1979. While the poorest Americans have actually seen their wages decrease by 5% since 1979. Coupled with rising costs of living, high unemployment rates through the last recession, and enormous increases in the cost of education, it seemed for a while that the average American worker was in a pretty bad situation, at least until recently. Millions of jobs over the last few years have been added to the American economy, and this trend shows few signs of slowing. At 4% unemployment, it now appears that The United States is in fact facing a labor shortage, and might continue to face a disequilibrium for some time. Although businesses are having difficulties adjusting to this shift in the labor markets, middle class Americans have reason to be hopeful about the future for the first time in awhile.

According to Deutsche Bank Economist Torsten Slok, it can take up to 31 days to fill an open job in America, up from 23 days in 2006, and about 15 days in 2009. As of last summer, 85% of small businesses that were actively hiring reported few or no qualified applications for their positions. A Federal Reserve survey found labor shortages all over the United States. It appears that job growth has increased the demand for new workers, whereas an aging population, coupled with new jobs requiring higher skills than ever before, have kept the supply of workers constant. Some studies point to the labor participation rate actually decreasing. Indeed, the labor force participation rate for men age 25-54 is currently around 89%, a figure less than other OECD countries’ such as Germany, France, Canada, and Britain. The result is a disequilibrium in the labor market, in this case a labor shortage.

Aging demographics are part of the reason why the labor supply in the United States has remained constant in response to the recent increase in demand for workers, a factor which may be offset by automation. Other reasons why able Americans are not jumping into newly created jobs but instead are choosing to remain out of the labor force, has to do with everything from wages, to the American education system. Although labor shortages can be felt throughout various industries, many are concentrated in sectors that are plagued by a lack of qualified candidates.

Many companies are concerned about losing out on business and growth opportunities, as difficulties in finding and training qualified employees can be costly. Though it seems what they fear most is having to raise wages in order to attract more applicants. Many economists seem to be indifferent towards the same labor shortage that has made business owners uneasy. Minneapolis Fed President Neel Kashkari summarized this viewpoint by stating what is obvious to economists, “if you’re not raising wages, then it just sounds like whining.” Indeed, Macroeconomics 101 explains how when demand exceeds supply in a given market, the price (in the case of labor markets this is the wage) must be increased in order to create a new equilibrium.

To some, the American shortage of labor may read as a signal to increase real wages, which many consider as long overdue. Although nominal wages have been growing in recent years at a rate of 2.6%, they still have not caught up to target growth levels of 3.5-4%. Many economists are pointing to the disparity between actual and target rates of growth as not only the reason behind the labor shortage, but also as a sign that many Americans still have not reaped the benefits of the economic recovery from the Great Recession. Although many businesses have begun to raise their wages, economists are emphasizing that more needs to be done for employers to remain competitive in a labor market with a 4% unemployment rate.

Increasing wages will almost certainly incentivize many Americans to reenter the workforce and increase the labor participation rate. But then there is still a question of how much wage increases can accomplish in ultimately transforming the labor shortage phenomena into a golden era for the American worker. Especially considering a large part of the reason why many Americans haven’t benefited from the creation of millions of new jobs is because of a mismatch between their training and qualifications, or what is known as a skills gap.

A skills gap exists when the training or education for a job is inadequate to the job’s demands. So even though the demand for workers is rising, they are not the types of jobs that many Americans are qualified for. Professor Alan Krueger at Princeton University explained that, “The jobs in demand are more skilled than the workers we have.” The National Skills Coalition, a nonprofit organization, calculates that middle-skill jobs in computer technology, health care, construction, high skill manufacturing as well as other fields account for 54% of the total labor market, while only 44% of workers are sufficiently trained to do these occupations. The labor force participation rate for prime-age workers is 88% for college graduates, 81% for those with some college, 76% for those with a high school diploma and only 66% for those without a high school diploma.  Figures like these suggest that where there is a substantial shortage in labor, there is a high correlation of low education attainment levels within the population. It is precisely these individuals that would benefit the most from additional training programs in order to be productive workers. Many people may think that a solution to this issue is to increase college enrollment for more Americans, but it is precisely the current education system that is failing to provide students with the skills they need to be successful in a changing workplace.

The belief that an increase in college enrollment is the solution to providing the prospective workers with skills needed for the modern workforce has resulted in what is known as degree inflation. From 1975 to 1995, all American workers’ education rose by 1.5 years, despite the fact that most jobs didn’t change much during that time period. Implying that more education for more Americans resulted in them not necessarily getting better jobs, but needing more education to do the same jobs that had been held by others with less education not too long ago. Degree inflation sets up many young people for disaster as it steers too many students who aren’t cut out for academic success onto the college track, wasting time, money & resources.

According to economics Professor Bryan Caplan of George Mason University, “The college-for-all mentality has fostered neglect of a realistic and important substitute: vocational education.” Either through the form of classroom training, apprenticeships, or other types of on-the-job training, students could be taught specific, in demand job skills at fraction of the cost and time of an university education. Research even suggests that vocational training raises pay, reduces unemployment, and increases the rate of high-school completion. With the rising costs of a college degree and the ever changing economy of the future, it is imperative that young people are given more practical and less costly avenues to career opportunities.

In order to fully close the skills gap the American labor market is experiencing, and ensure businesses will continue to grow and foster innovation, Americans who haven’t attended college need to be given opportunities for training and practical skill advancement. Business leaders are in a position to initiate cooperation with local high schools, colleges and community-based organizations to develop curricula that would produce candidates with the skills needed to fill job openings. An example to follow may be that of the Swiss education system, where compulsory education ends at the 9th grade level, after which students can choose between a vocational or academic path. About 30% of students choose the academic path which focuses on a minority of professions such as law or medicine. Nearly 70% choose the vocational track and enter different programs which prepare them for a variety of occupations. Subsequently, Switzerland’s youth unemployment rate is about a quarter that of the United States’.

The future will bring an increasing amount of technological disruptions along with unpredictable amounts of structural change. It is imperative that the United States create opportunities, both at the private or public level, for workers to be trained and retrained for the 21st century labor market. Skill training programs such as these will increase labor force participation, alleviate the astronomical problem of student debt, create sustainable economic growth for the middle class, and ultimately ensure a strong and adaptable economy. Currently young Americans’ choices after high school are either college or minimum wage employment.  Future economic prosperity is relying on America’s ability to utilize the dormant talent and skills of its citizens that have yet to be realized.

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