'Skills Gap' Can Be Narrowed With Higher Wages

(Bloomberg) -- There are about 6.5 million job openings in the U.S., a record high. The number of people looking for work without success is falling as well, and this combination means that the economy now has close to one active job seeker for every open job. The unemployment rate is below 4 percent — another indication that workers who are actively looking for jobs can find them.

Predictably, businesses are expressing concern. The National Federation of Independent Business survey reports that over one-third of small businesses have a job opening they can’t fill. Nearly one-quarter of all small-business owners claim that finding qualified workers is their “single most important business problem," surpassing their objections to tax or regulatory burdens. Reflecting these worries, press reports are popping up about labor shortages.

How serious are these concerns?

First, this is a good problem to have. A labor market in which businesses complain about the difficulty of finding workers is welcome news following the hardships suffered by workers in the Great Recession and its aftermath. If employers are chasing employees rather than the other way around, fantastic.

There is evidence, for example, that businesses are now reducing barriers to employment for workers with criminal histories. Burning Glass, a company that analyzes the labor market, recently used data from online job postings and found fewer businesses are requiring background checks. The largest drops are in the low-wage sector, among occupations like maids, housekeepers and custodians.

This is a welcome development. It’s also relatively inexpensive.

A frequent complaint among businesses that would cost more money to address is that they can’t find workers with the right skills.

This complaint is perennial. You’re hearing it now, when unemployment is 3.9 percent. But you also heard it in the summer of 2014, for example, when unemployment was more than 6 percent. The Manufacturing Institute surveyed manufacturers and found that over 80 percent reported a shortage of skilled workers available for hire — in 2011, when the unemployment rate hovered around 9 percent.

Why might this issue cost some money to address? Because to the extent this is a problem, the real solution includes training. Businesses are all too often trying to find the perfect candidate — a person who could step into the job on day one and be near peak productivity, without needing to learn anything substantial about the specifics of the job.

In part, this impulse is understandable: The strength of the relationship between workers and companies has weakened on both ends. Under the old lifetime-employment model, a business felt comfortable investing in significant worker training because the business expected the worker to stick around for a long time. Today, when this expectation is significantly diminished, why invest in training when you might not get a good return?

Even still, many businesses seem to have taken this too far. In many cases, hiring workers who are not a perfect fit and making some investment in training will pay off. It might also engender more company loyalty among workers, making them less likely to leave after just a short time, and allowing businesses to profit further from their investment. In addition, making better use of “probationary period” compensation packages and community colleges to provide training could help address this issue. (The latter would require better public policy, but that’s another column.)

The nation’s largest retailer might provide a model for other businesses to follow. Over the past few years, Walmart has sent thousands of employees to a formal training program lasting several weeks that teaches management and merchandizing skills. In addition, Walmart has invested in entry-level employees through a combination of computer-based and in-store instruction. It’s too early to know the long-term effects of these training programs — both for Walmart and its employees — but so far the programs are very promising.

Another solution to the concern over the perceived skills gap is to push supply and demand in the labor market closer together. Opportunity@Work, an innovative nonprofit social enterprise, is trying to do exactly this. “If employers want to solve the skills gap,” according to Byron Auguste, the group’s CEO and co-founder, “the solution is to hire for skills mastery rather than resume history.” One of Opportunity@Work’s aims is to change hiring practices so that employers are better able to determine if applicants — many of whom would otherwise be overlooked using traditional hiring methods — have the skills and competency needed for the job.

But when I hear businesses complaining about labor shortages and skills gaps, the first thing I think of is not training and hiring barriers. It’s wages.

Wage growth is picking up, but it is lower than what many economists expect in light of overall economic conditions, and it is not soaring for specific industries. 

Simply put, if businesses can’t find workers — or can’t find workers with the right skills — they should raise their wage offers. Basic supply-and-demand logic suggests that doing so will broaden the pool of workers interested in the job, and will make the job more desirable to applicants. In addition, raising wage offerings would likely draw in some of the millions of Americans who report they want a job but are out of the labor force. 

So unless wage growth picks up, the warnings about labor shortages will fall flat.

To contact the author of this story: Michael R. Strain at mstrain4@bloomberg.net.

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net.

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