AS noted previously, much has been made in Maine regarding twin structural problems in the state’s labor market and overall economy. The first problem is that Maine’s shifting demographics are causing a labor shortage (or, some will argue, will within the next 6 years). However, the concern over shifting demographics is a bit misplaced; at least in terms of what is the more immediate problem. Specifically, the more immediate problems are the (relatively) low employment rate for the state’s prime age workers and college graduates, and the long-term unemployed. The longer these groups remain out of work and, in some instances, out of the labor market, the more likely they will either remain unemployed or be under-employed. Currently the state has a sufficient number of potential workers to meet demands, generally speaking. However, there is still the possibility the state is struggling with a scarcity of labor. How is that possible? Enter the second structural argument; the skills gap.
Succinctly, an economy suffers from a skills gap when the skills employers demand are not supplied by the current labor force. This is true even when the total number of available workers exceeds job vacancies. As a result, unemployment is not due to slack demand in the economy, as businesses look to hire but are unable to find workers with particular skills. The skills gap has gained a lot of traction in Maine, with policymakers and pundits from both sides of the political divide arguing that Maine’s laborforce is ill-trained/educated to meet the demands of businesses. Most important is the contention that closing the skills gap will boost Maine’s economy.
There two fields that skills gap proponents often point to as evidence either of a current skills gap or a looming one; STEM and nursing. These fields often require college and advanced degrees, but also are highly illustrative of the issues with the skills gap argument. However, while terms such as STEM, structural unemployment, skills gap, and knowledge based economy are often tossed around to support the claim that Maine is enduring, or will soon be, a skills gap, the notion that Maine is suffering from a skills gap has become axiomatic. Axioms aside, what does the data reveal?
While the skills gap has gained traction with various folks in Maine, the data does not necessarily comport with that explanation for Maine’s unemployment. First, wages are not rising quickly enough, and in some industries that claim to be suffering from a lack of skilled workers, real wages have declined. Second, proponents of the skills gap often point to national surveys and studies to support their argument that businesses are struggling to fill positions. However, those surveys reveal two things. First, that the onset of the skills gap, according to businesses who say they are struggling to fill vacant positions, was acute. This does not comport with the more gradual nature of structural changes in an economy. Second, that some of the jobs businesses are having the most difficultly filling are not the ilk one would associate with a skills gap; such as hotel and restaurant staff workers. Third, in Maine, college graduates are more prevalent in the workforce than ever. It is difficult to square the rise in college degrees holders with claims that Maine is short of college degree holders. Finally, job growth projections are not as daunting as purported. While Maine does face some challenges, those challenges are both in the long-term, and not as drastic as presented.
First, simple economics
Prices are supposed to lead to an efficient allocation of resources by signaling to producers and consumers to either increase/decrease supply/demand. When the price of a good goes up, producers will increase supply, or consumers will decrease demand. Labor is a good (a service really), and wages are the price. When the price increases, that is a signal to producers (workers or potential workers) to offer those services. (Hence some people enter particular fields because wages are higher in those fields). As a result, if there is a current skills gap, we should see pockets of rapidly rising wages.
Using data from the Bureau of Labor Statistics, wages in the STEM and nursing fields does not reveal that to be occurring. The graphs below compile average annual wages for the various fields from 2007 to 2013 to see if there has been rapid wage growth indicative of a skills gap. Further, if there has been wage growth, the wages for those industries in Massachusetts, New Hampshire, and the United States have been included to create context to see whether Maine’s wage growth is unusual, as well as to see where Maine’s wages stack up to those other economies. Lastly, to better compare the rates of growth in wages, an index has been included for each industry.
First, for architecture and engineering fields:
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There are two things to note. First, as the index reveals, Maine’s wages for these fields have grown much more rapidly than the other three economies. One explanation for this increase in wages could be from a decline employment, where when a recession hits and firms start lay-offs, workers at the lower end of the wage spectrum tend to be laid off before workers at the higher end, thus pushing average wages up. It’s difficult to argue that vis-a-vis Maine given the data. Since 2007, Massachusetts, New Hampshire, and the U.S. have experienced employment declines in the architecture and engineering fields, while Maine has experienced a slight increase (although employment in Maine has declined by almost 10% since 2009).
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Given the rate of wage increase in Maine both independently as well as relative to the wage increases in Massachusetts, New Hampshire, and the U.S., there is some evidence of a labor shortage. However, the rapid decline in employment from 2009 erodes the skills gap explanation for the wage gains somewhat. As noted above, average wages will increase from workers at the lower end of the wage spectrum being laid off. In this case, higher earners will not see their wages rise. Of course, there can still exist the skills gap with declining employment in an industry, but wages at the top end of the wage-spectrum (typically wages and skills are strongly related) would rise. There is only a small window of data available, but breaking down wage gains by percentile reveals that most of the wage gains in the architecture and engineering fields occurred at the lower ends of the wage spectrum, with the highest percentile of wage earners’ wages barely rising.
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Again, it’s a small sample, and we are still in the midst of an economic recovery, so the weight of the data is somewhat limited, but what weight there is suggests wages in these fields are not rising as the result of a skills gap.
Like engineering, wages in the Life, Physical, and Social sciences (a diverse field that includes physicists, biologists, chemists, and other occupations that help make up the STEM fields) have not experienced rapid wage gains.
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Unlike the architecture and engineering fields, the LPO fields are not experiencing a rapid rise in nominal wages in Maine. Moreover, Maine’s wages lag behind Massachusetts, New Hampshire, and the U.S., and in real dollars, wages Maine’s LPO fields have declined. This all suggests that wages are not being bid up as businesses compete for scarce labor. Moreover, real wages have decline, when this is coupled with the fact that employment in the LPO fields has declined approximately 11% since 2007, it’s tough to argue a clear skills gap in these fields.
The last STEM related field we will look at is the computer and mathematics fields. Like the LPO fields, computer and mathematics have not experienced rapidly rising wages to suggest a scarcity of labor.
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Here we have Maine’s wages outpacing Massachusetts and New Hampshire, but only by a slim margin. This wage growth has occurred while Maine’s employment increases (19% since 2007) in the computer and mathematics fields have outpaced the other three economies. However, adjusted for inflation, wages in these fields in Maine have declined, and they still lag behind Massachusetts, New Hampshire, and the U.S. As such, there is little evidence that labor is currently scarce in these fields.
The last industry we will look at is nursing. Again, wages for registered nurses in Maine relative to Massachusetts, New Hampshire, and the U.S. lag. Moreover, in real dollars, Maine wages for RNs has declined since 2007.
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Moreover, employment for RNs in Maine has remained static (13,850 in 2007, 13,890 in 2013), meaning employment has had a negligible impact on wages.
The above should not be considered conclusive, but it is highly suggestive that labor in these various fields is not as scarce as some suggest. We should see rapidly rising wages during times of static or growing employment. Moreover where employment has declined and wages rise, such as with engineering and architecture, we should expect to see wages at the higher end of the wage spectrum increase. Again, it’s a small window of data so weight is limited, but there is little indication of scarce high-skilled labor in those fields.
Also, the problem might not lie in Maine’s inability to produce skilled labor, but rather to retain it. While it may seem crass to reduce one’s decisions to attend college and where to make a living to financial one, the steady increase in higher education coupled with stagnating wages makes the financial realities a larger driver in those decisions.
Second, national level surveys do not say there’s a pervasive skills gap
Many skills gap proponents point to various national level studies and surveys of businesses to suggest there is a skills gap. But what are these studies and surveys revealing?
For starters, using the national and international Manpower Talent Survey for 2014 which lists the ten positions companies are having the most difficulty filling, we see some curious fields:
- Skilled Trade Workers
- Restaurant and Hotel Staff
- Sales Representatives
- Accounting and Finance Staff
- IT Staff
While some of those fields require degrees or advanced training–one might expect IT staff and engineers to be included on the list–, but laborers and restaurant/hotel staff are odd examples of a skills gap. Moreover, the curiosity of the list is compounded when we look at the reasons why businesses are having problems filling these positions.
According to the same Manpower survey, the top five reasons given by employees for having difficulty in filling positions are:
- Lack of Technical Competencies (hard skills)–47%
- Lack of Workplace Competencies (soft skills)–39%
- Lack of Available Applicants/No Applicants–36%
- Looking for more pay than is offered–30%
- Lack of Experience–25%
Businesses report that lack hard skills are the top reason for the inability to fill positions, but what hard skills are required for laborers and restaurant/hotel staff? This is not to suggest that hospitality and similar businesses are not having problems finding restaurant/hotel staff, but that a shortage of labor in that industry does not point to needing state or national legislation to address a “skills” shortage.
Moreover, constructing these surveys come from employer responses, who deal with applicants–not potential applicants. While that seems obvious, the distinction is important because competent workers may be deterred from applying because wages and benefits published with the job postings are too low. As a result, these surveys cannot accurately gauge the talent of potential workers.
Further, this chart, published with the same Manpower survey, raises some questions about claims of a skills gap–notable how quickly the skills gap descended on our economy:
While we would expect businesses to have fewer and fewer problems filling positions during an economic downturn, the drastic rise in employers struggling to fill positions in 2011 is rather surprising. What’s surprising is that there were enormous employment losses in 2009 and 2010, meaning the pool of potential workers increased drastically. More importantly is that it is hard to fathom that the skills of the recently unemployed eroded so quickly as to make their skills obsolete. If there is a skills gap, and that skills gap is why potential workers cannot be hired back into the workforce, then we must assume that the skills of the potential worker pool (filled with recent lay-offs) must have eroded in such a short time span–in the case of the above graph, one year. As economist Edward Lazear wrote in 2012:
The structure of a modern economy does not change that quickly. The demographic composition of the labor force, its educational breakdown and even the industrial mix did not differ much between 2007 and 2009.
A similar argument can be made vis-a-vis industries in Maine, such as the engineering field where employment fell by approximately 11% from 2009 to 2011. If the engineering field is struggling to find workers, what happened to the 11% (1,070 workers)?
Lastly, the reports of the skills gap in certain industries, such as manufacturing, have conflicted in terms of severity. If you pay attention to the skills gap debate whatsoever, and in particular as it impacts the manufacturing industry, you have probably have around about the purported 600,000 manufacturing jobs still vacant in the U.S. From a 2013 PPH article:
Manufacturers have become leading skills gap advocates.
A recent report from the Manufacturing Institute showed that more than 600,000 manufacturing jobs nationwide were unfilled because employers couldn’t find workers.
However, a study performed by the Boston Consulting Group suggests that the Manufacturing Institute report inflates the pervasiveness of the skills gap:
- We estimate that the U.S. is currently short around 80,000 to 100,000 highly skilled manufacturing workers. But those numbers represent less than 1 percent of the nation’s total manufacturing workforce and less than 8 percent of its highly skilled workforce of approximately 1.4 million.
- The skilled-worker shortages that exist in the U.S. are localized. Only 5 of the nation’s 50 largest manufacturing centers—Baton Rouge, Louisiana; Charlotte, North Carolina; Miami, Florida; San Antonio, Texas; and Wichita, Kansas—appear to have significant or severe skills gaps. Ninety percent of the biggest manufacturing areas do not show evidence of significant manufacturing-skills shortages.
Moreover, the BCG report found that while the country faces a potential shortage of skilled workers in the long-term, currently businesses are “not doing enough to cultivate a new generation of skilled manufacturing workers in the U.S. Manufacturers have scaled back their in-house training over the years, and they underutilize important sources of new talent such as high schools and community colleges.”
The issue of businesses cutting back on training programs in the context of the skills gap discussion is very important. As Cait Murphy at Inc.com wrote earlier this year:
Last year, the U.S. Department of Labor counted just 287,750 active registered apprentices, far fewer than the 488,927 a decade before. (The rate is also less than a 10th of Britain’s.) To be sure, registered apprenticeships are only those recognized by the U.S. Department of Labor, so the figures aren’t exhaustive. But, still…not so good.
And there’s more. In late 2011, only 21 percent of U.S. workers surveyed by Accenture said they had received any formal training at work in the previous five years. According to Training magazine, the share of GDP spent on instruction fell from 0.52 percent in 2000 to 0.34 percent in 2012. Matt Ferguson, CEO of CareerBuilder, surveyed more than 2,000 employers. He estimates that 80 percent of them say they are concerned about a skills gap, but only 40 percent are doing anything about it.
What does this mean? It could mean that businesses did not want to make the investments in human capital only to have that capital leave for a another business. If the cost of training a new/untrained employee is higher than the cost of paying an experienced/trained employee, it is more economic to cut the training program and hire employees away from competitors who do train new employees. As more and more businesses do-away with training programs, fewer and fewer workers receive on the job training (of course this phenomena should also be driving up wages).
While some might contend that manufacturers are restricted in what they can pay workers or how much training they can offer, there is data to suggest otherwise. While manufacturing firms are not monolithic, and instead have different revenue streams and profit-margins, macro data suggests that manufacturing firms are not unable to pay higher wages for labor. From a 2013 Bloomberg article:
Even with hiring and output robust enough to be dubbed a manufacturing renaissance by President Barack Obama, workers are falling behind. Factory pay hasn’t kept pace with inflation and has fallen 3 percent on that basis since May 2009, while average pay for all wage earners slid only about 1 percent.
. . .
Manufacturers’ after-tax profits rose to a record $289.1 billion last year, more than three times 2009’s tally, the Commerce Department reported. The Standard & Poor’s 500 Industrials Index has more than tripled since its 2009 low, and topped the broader index by 59 percentage points over that span.
The average hourly wage in U.S. manufacturing was $24.56 in October, 1.9 percent more than the $24.10 for all wage earners. In May 2009, the premium for factory jobs was 3.9 percent. Weighing on wages are two-tier compensation systems under which employees starting out earn less than their more experienced peers did, and factory-job growth in the South.
Since the U.S. recession ended in June 2009, for example, Tennessee has added more than 18,000 manufacturing jobs, while New Jersey lost 17,000. Factory workers in Tennessee earned an average of $54,758 annually in 2012, almost 10 percent less than national levels and trailing the $76,038 of their New Jersey counterparts, according to the Bureau of Labor Statistics.
“What’s being referred to as a recovery in manufacturing is to a large extent a recovery in profitability,” said Dean Baker, co-director of the Center for Economic and Policy Research, a Washington-based group funded by unions and private foundations. “That’s good for the companies and good for the shareholders but it’s not necessarily good for the workers.”
Lastly, a recently published study from the Brookings Institute examined job vacancies in the STEM fields. The study notes that STEM positions take twice as long to fill as non-STEM jobs, arguing that “regional supply of workers in a given occupation affects the length of vacancy advertisements.” Analyzing data from the labor market data company Burning Glass, the authors found that STEM related fields take longer to fill than non-STEM related fields, suggesting that there is a labor supply shortage in these fields.
However, the authors also found that:
Within one day, 44 percent of U.S. job advertisements in the Burning Glass database are taken down. In some cases, the removal may be due to internal promotion, and the ad itself may represent a symbolic gesture intended to meet human resource standards. It is not possible to know from these data, but ads taken down within one day share many characteristics with ads taken down a few days later. Fully half of all ads are taken down within one week. Previous research finds that employers stop advertising once they have collected a sufficiently large pool of applicants.
Moreover, for comparable levels of education, the study found that STEM related fields took just one week longer to fill than non-STEM related fields at the 80th percentile of job advertisements. Also, for the 80th percentile of job advertisements posted on employer websites, the study found the longest vacancy duration was for the Education, Training, and Library Occupations at 109 days. Third was Architecture and Engineering at 81 days, tied with Food Preparation and Serving Related Occupations.
In short, national-level studies and surveys do not fully comport with the skills gap argument. Of course, it’s difficult to reconcile what is happening at the national-level with what is happening in Maine in a lot of industries. Maine is comprised of smaller businesses in fewer industries than the rest of the U.S. economy. Profit-margin and labor demands differ, and the shortages occurring at the national-level might not effect Maine. As a result, they might not be the best evidence of a skills gap in Maine. But to the level national surveys and studies are used to buoy the skills gap argument in Maine, they don’t offer a lot of supporting evidence.
Third, college degrees are up, but college employment is down
Many reports and studies forecasting a skills gap in Maine all suggest that the state must increase the number of college graduates to meet the growing demands of businesses. However, if college graduates were the solution, then it’s difficult to tease out what the problem is because of two facts. One of the clearest ways to discern whether an economy is suffering from cyclical or structural unemployment is to compare the current employment rates of college degree holders to the pre-recession rates. First, the workforce is more educated, and continues to get more educated:
According to data from the Center for Workforce Research and Information, the number of college graduates in the labor force has grown from 184,000 in 2007, to 211,000 in 2012 (the most recent data available). However, while the number of degree holders as increased, over that same time period the labor-market indicators for college graduates has declined; the labor force participation rate is down 2 percentage points, while the employment rate is down 2.1 percentage points, the unemployment rate is up 0.2 percentage points, and the total number of employed persons with a college degree is down slightly from 167,000 in 2007 to 163,000 in 2012 despite the number of college degree holders in the workforce up by 27,000).
What this points to is a short-term cyclical problem rather than evidence of a long-term structural problem. When those most likely to be employed (25 – 54 year-olds, college degree holders, etc.) are having greater difficulty finding work or are underemployed, it is usually the result of slack demand in the economy.
It is difficult to reconcile the argument that Maine’s laborforce lacks training and education with the above data. Of course some will argue the job growth forecasts mean that the state will face a labor supply problem. However . . .
Fourth, job forecasts are a little nebulous
While some may argue that job forecasts project Maine will be in short-supply of workers with specific skills (the term “crisis” is sometimes used to describe the impact of the skills gap), data from the Center for Workforce Research and Information suggests otherwise. The CWRI data reveals that in 2010, 17.1% of all jobs in Maine require a bachelor’s, master’s, or doctoral/professional degree, and by 2020 that percentage will increase just 0.4 percentage points. In raw numbers, the total number would climb from 110,060 to 118,158. By comparison, in 2012, there were 211,000 members of the workforce holding a college degree or higher, and 273,000 in the total population. This comports with what Jessica Hall reported for the PPH last year:
Of the top 25 jobs that are expected to see the highest growth in actual new job openings, 18 don’t require more than a high school education, according to the report, including wait staff, cashiers, maids, home health aides, janitors and warehouse workers, all of which pay around $12 an hour or less. The state’s Department of Labor defines “high wage” as a median wage above the $32,510 per year, or $15.63 an hour, the median wage of all Maine occupations in 2011.
Only three of the top 25 jobs require at least an associate degree: accountants, physicians and registered nurses.
Interestingly, while nursing may be one of the fastest growing fields that requires an associate’s degree or higher, Maine’s current supply will meet projected demands, according to the Maine Labor Department’s 2014 Health Occupations Report. The projected average annual job openings for registered nurses is projected to be 547 to 670, with the BLS assuming 580. From 2007 to 2011 Maine produced between 832 and 893 RNs. While the issue might be one of mix where the problem is not the supply of RNs per se, but whether we have an appropriate amount of Bachelor’s trained RNs (BRNs) or too many RNs with Associate’s degrees. However, even assuming a full switch in demand to BRNs does not create a labor shortage.
According to the MDOL’s report, 53% of Maine’s RNs have a bachelor’s or graduate degree, just 2 percentage points below the national average. In 2011, Maine’s colleges graduated 526 RNs with a Bachelor’s or graduate degree. While outside of average annual job opening projections, that is just approximately 11% below the BLS projection of 580. Of course, that assumes a drastic demand switch completely to BRNs.
Lastly, many policymakers making forecasts of labor shortages in various fields have relied on a report premised on flawed methodology. As noted here previously, that report, authored by James Carnevale and others, projects that 59% of all jobs in Maine will require a college degree by 2018. However, the underlying premise of Carnevale’s projections, that current supply is a good indicator of current demand, grossly underestimates the level of under-employment in the economy. In terms of training and employment, there is a lag between supply and demand. For instance, when employers demand certain skills, workers cannot necessarily supply those skills on short notice (a bachelor’s takes at least 4 years, and advanced degrees longer). As a result, supply will not meet demand for a few years, potentially. Likewise, however, when people enter college, they are doing so based on current demand, but will graduate under different circumstances. Think of the college students entering their freshmen year in the fall of 2005, and how different that job market looked than when they graduated in 2009, 2010, or even 2011. As a result, current supply can be an indication of past demand, but extrapolating current demand from current supply given the lag creating the supply is questionable.
In short, the job forecasts are a little nebulous in terms of what Maine’s labor demands will be, and by how much the state will come up short (if at all).
Finally . . .
The above is not necessarily conclusive, might it does suggest that the skills gap is at least overstated in terms of its pervasiveness, and the predictions and forecasts are not as dire as at times portrayed. Of course, status quo will not suffice for long-term economic policy, and Maine should continue to invest and improve its education infrastructure, but the focus on the skills gap and the belief that simply increasing the supply of college educated labor will boost the state’s economy is a little misguided. Yes, in the long-term, Maine faces some structural challenges, but how daunting those changes will be to the state’s economy are a little more nebulous than often portrayed.
Most importantly, the structural arguments that will/might hit Maine in the future are not the cause of current economic conditions. Current economic conditions are the result of the 2008 recession, which was the result of a massive demand shock (consumers stopped spending, businesses stopped hiring, etc.) rather than a structural shock (people couldn’t get hired because they did not have the right skills) The state is suffering from weak demand, and closing the skills gap will not resolve that issue. Long-term unemployment, underemployment of college graduates and other workers, and the like all lead to an erosion of skills which can then exacerbate the structural problems down the road.
There’s not a lot of evidence that Maine is currently suffering from a skills gap.