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Jul022011

Skilled labor shortages in declining industries accelerate the decline.

There are numerous reports recently that manufacturers are having trouble finding enough skilled workers to fill domestic job openings. That seems counterintuitive because the shrinking of American manufacturing should leave, one would think, a surplus of skilled labor eager to fill those jobs and even take lower pay. Researchers at the Chicago Fed have looked into this and suggest some reasons why shortages of skilled labor are to be expected in declining industries. Shortages are not due to some deficiency in the educational system but to rational choices of people to go into growth industries instead. Since people with the most skills probably have more choices about where they work, declining industries should expect shortages of high-skill workers—even as they have gluts of low-skill workers.

In Why are manufacturers struggling to hire high-skilled workers? Lombardi and Testa compared education levels and wages between manufacturing and non-manufacturing from 1990 to 2007. They found that wage premiums in manufacturing did not rise to attract more and better high-skill workers—instead, manufacturing wage premiums shrank.  They note that US manufacturers are under such great price pressure that they can't afford to pay more even for skilled workers.  They conclude by saying—

"One possibility is that declining manufacturing job prospects may be self-reinforcing, leading to a negative image among prospective employees.  If so, the pool of available workers at any given educational attainment may be inferior to that in previous times."  

That suggestion would be consistent with other reports that new Ivy League graduates are going overwhelmingly into financial services and avoiding manufacturing like the plague, that physics Ph.D.s from top schools are still going to Wall Street to develop trading algorithms instead of doing manufacturing or even physics, and that students studying computer sciences are increasingly from abroad as Americans pursue other majors. 

There are, of course, many factors that can influence individuals in their career choices. One that seems to show up here is that many people intuitively understand how different it is to work in a growing business from working in a shrinking business, and they try to avoid the latter. In a growth business, wages and benefits tend to rise as employers staff up by hiring workers away from the good jobs they already hold, the threat of layoffs seems remote, learning opportunities and promotions come quickly with staff growth, the workplace is happier and full of achievers, and the American Dream of increasing prosperity seems at hand. In a shrinking business, there is downward pressure on compensation, there is job insecurity, learning and promotion opportunities are rare to non-existent, and work places are apt to be populated by unhappy hangers-on who know the American Dream is unrealistic for them. I think these differences may be sufficient to explain career choices that result in skilled labor shortages for declining industries, but the matter of compensation deserves emphasis.

Declining industries generally have shrinking profits and enormous pressure to minimize costs. So, if they have a skilled labor shortage, the normal management response of increasing compensation to attract and hold workers is unavailable. To some extent, US companies are solving the problem with immigrant workers on H-1B visas because the US wage level is still higher than in their native lands. However, as global wage convergence proceeds, the wage premiums US companies are able to pay to attract foreign workers will decline and they will tend to stay/return home. Instead of saving US industries by reducing pressures on margins, global wage convergence may accelerate their decline by drying up their last remaining source of skilled labor.

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Reader Comments (1)

The other problem with going into a declining industry, that you don't emphasize, is that as cuts take place, employees that remain are pressured to take on the work or part of the work of the terminated employees, with no extra compensation. This leads to exhausted and discouraged employees. Alternatively,or concurrently, employees are terminated and the employees who remain are in the firing line for quality/service standards that cannot be maintained. In some cases, as with libraries, the remaining employees are left to face an unhappy public as well.

July 8, 2011 | Unregistered CommenterChristine

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