Higher wages cure labor shortages continued

What to do about labor shortages (real or perceived) in the skilled trades/mid-skill jobs is a top economic priority for Governor Snyder. As we explored in our last post he is pushing for a reemphasis on vocation programming in high schools. And now has created a super agency––the Department of Talent and Economic Development. It will oversee the Michigan Economic Development Corp., the Michigan Strategic Fund, the Michigan Unemployment Agency, the Michigan Workforce Development Agency, and the Michigan State Housing Development Authority.

The assumption seems to be that government is the prime cause of labor shortages. If only government––largely through the education system––were more aligned with the needs of employers there would be no labor shortages. Many believe this analysis is wrong.

As we have explored previously a far more likely prime cause for labor shortages is that the jobs are not attractive to job seekers. Largely low wages. And that the way to balance supply and demand is for employers to raise wages and make those jobs more attractive.

What follows is a post I wrote in 2012 on the topic. Its analysis remains relevant today.

“Conventional wisdom is that there are plenty of jobs available that are vacant because too few Americans have the skills employers need in an increasingly knowledge-based economy. Not just the STEM professions, but also technical jobs in manufacturing, construction, health care, etc. President Obama and Governor Snyder are among many business and political leaders pushing for a re-emphasis of vocational training in high schools and/or community colleges as the key to dealing with labor shortages, particularly in the skilled trades in manufacturing and construction.

A terrific New York Times Magazine article by Adam Davidson entitled “Skills don’t pay the bills” argues that low pay is the main cause of those unfilled jobs, not a skills shortage. Highly recommended. As Davidson writes:

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. (Emphasis added.)

In a recent study, the Boston Consulting Group noted that, outside a few small cities that rely on the oil industry, there weren’t many places where manufacturing wages were going up and employers still couldn’t find enough workers. “Trying to hire high-skilled workers at rock-bottom rates,” the Boston Group study asserted, “is not a skills gap.” The study’s conclusion, however, was scarier. Many skilled workers have simply chosen to apply their skills elsewhere rather than work for less, and few young people choose to invest in training for jobs that pay fast-food wages.

The article features a manufacturer that pays its plant floor technicians from $10-18 per hour. No where near the $28 an hour that unskilled factory workers were earning at the Detroit Three a few years ago. And what are the skills that employers are seeking at up to $18 an hour? As the Times describes: “Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code. It also requires a worker with the ability to figure out what’s going on when the machine isn’t working properly.” Hardly anyone with those skills is going to be satisfied with a $10-18 an hour job.

Add to lower wages jobs the fact that manufacturing (and construction) skilled trade have seen mass layoffs for years. There may be more demand for workers today than jobs, but this comes after a long period of far more supply than demand. Hard to attract workers to occupations when fathers and older brothers in those occupations have been laid off repeatedly or have lost a job and never found another in the occupation.

The article reports on a manufacturing CEO who has machining jobs that he can’t fill: “He was deeply frustrated when his company participated in a recent high-school career fair. Any time a student expressed interest in manufacturing, he said, “the parents came over and asked: ‘Are you going to outsource? Move the jobs to China?’ ” While Isbister says he thinks that his industry suffers from a reputation problem, he also admitted that his answer to a nervous parent’s question is not reassuring. The industry is inevitably going to move some of these jobs to China, or it’s going to replace them with machines. If it doesn’t, it can’t compete on a global level.”

The article continues: “In earlier decades, Wial (from the Brookings Institution) says, manufacturing workers could expect decent-paying jobs that would last a long time, and it was easy to match worker supply and demand. Since then, with the confluence of computers, increased trade and weakened unions, the social contract has collapsed, and worker-employer matches have become harder to make. Now workers and manufacturers “need to recreate a system” — a new social contract — in which their incentives are aligned.”

So what is the answer? A Yahoo Finance article, on the same topic, portrays how employers can effectively deal with labor shortages. In some part it is about training, but it is far about employers offering higher paying and more attractive jobs. Yahoo writes about a trucking company that is dealing with chronic shortages of truck drivers by making the job more attractive to job seekers. The article and accompanying video are worth checking out.

Yahoo writes: “Our team traveled to Omaha, Neb., to meet with the president of Werner Enterprises (WERN) to see how one of the biggest players in the business is addressing this shortage of drivers. Not only are they training more, paying better and putting their people in an almost brand new fleet of trucks, they’re also reinventing themselves in a way that allows their drivers to get home to their families a lot more often.” Yahoo says the average wage for truck drivers is $55,000.

This is how markets should deal with supply and demand mismatches. Not government picking occupations or moving P-20 education away from providing students with the broad skills they will need for a forty year career rather than pushing educators toward emphasizing the narrow skills needed for whatever jobs where there might be a shortage of workers today.”

Print Friendly, PDF & Email

Social Links

Featured Video

Play Video

Newsletter Signup

* indicates required

Latest Reports

Recent Posts