The Labour Shortage Hoax (By Alan Tonelson in American Economic Alert)

January 27, 2006: The Labour Shortage Hoax (By Alan Tonelson in American Economic Alert)

American Economic Alert
The Labor Shortage Hoax
Alan Tonelson
Friday, January 27, 2006

Theres a new glut on world markets. No, Im not talking about the gluts of Chinese apparel or shares of Google stock bought at $475 each or of sub-prime U.S. lenders. Im talking about the new glut of studies claiming that what really ails the U.S. economy is a shortage of skilled workers.

In fact, all these studies really show is that theres still another glut thats engulfed the economic policymaking world of raw, unadulterated chutzpah. What else could explain the contention that, as American multinational companies continue offshoring even the nations most knowledge-intensive, best-paying jobs, the biggest problem these same companies face at home (along with smaller firms) is finding enough qualified workers to take advantage of all the extraordinary career opportunities theyre creating?

Not surprisingly, these studies are all coming from the outsourcing lobby itself. In November, the National Association of Manufacturers, whose sector of the economy has lost 3.34 million jobs since employment peaked in 1998, reported finding a widening gap between the dwindling supply of skilled workers in America and the growing technical demands of the modern manufacturing workplace. In fact, 39 percent of the firms responding to a NAM-sponsored survey reported shortages of unskilled production workers.

The U.S. Chamber of Commerce chimed in shortly after the new year, declaring in its new State of American Business report, We are staring right in the face of a severe worker shortage as 77 million baby boomers prepare to retire in the next five years…. Added the Chamber, Many new jobs will require more technical skills and a greater understanding of math and science, subjects in which American students fail to show a suitable level of competence or even interest.

And the leading lobby for high- tech outsourcers, the Information Technology Association of America, continues to warn of a crisis in the availability of technically skilled workers and the need to greatly expand the number of scientists, engineers, and mathematicians graduating from American colleges and universities.

Whats wrong with these findings? Only two things: First, the main studies themselves are slipshod methodogically and internally contradictory. Second, they clash with everything known about major trends in the U.S. labor market, and about labor shortages themselves.

The study attracting the most attention has been NAMs effort, a survey of manufacturers conducted by Deloitte Consulting. To put it mildly, NAM should ask for its money back. Only 10 percent of the 8,000 companies contacted by Deloitte replied, and as Wall Street Journal columnist David Wessel noted, lots of self-selection surely was at work. Specifically, employers not perceiving any shortages probably were much less likely to bother responding than those that did.

Further, Deloitte ignored a major irony that practically shouts out from the results: Although the consulting firm recommended that companies spend at least three percent of their payrolls on employee training, it found that fully three-quarters of all respondents fell short of this threshold. Moreover, only half the total respondents have increased their training expenditures over the last three years. And 64 percent of total respondents are training 60 percent of their workers or fewer. Does this sound like the behavior of firms that value trained workers and are desperate to secure them?

Similarly, many of the policies long championed by these multinational-dominated business groups thoroughly undercut their professed concerns about labor shortages. For example, its hard to imagine that talented people will flock to manufacturing production careers in a nation whose trade policies encourage the massive offshoring of such jobs. And its hard to imagine that talented people will flock to research, development, engineering, and design careers in manufacturing in a nation that not only encourages the offshoring of these jobs, too, but that admits large numbers of immigrants who will do this work for bargain basement pay. Yet thats exactly the kind of nation that Washington has given us at the behest of the same multinationals now crying Labor shortage! Talk about creating a self-fulfilling prophecy!

Indeed, U.S. Chamber of Commerce President Thomas Donahue has declared that passing a new immigration reform bill with a guest worker program is one of his organizations top priorities this year.

Just as important as the incoherence of these multinational positions is the overwhelming evidence from the U.S. labor market exposing the shortage claims as bunk. Actually, according to mainstream economic theory, the very idea of long-term shortages or surpluses of any commodity (including, by definition, labor) is a non-starter. And if you think about it, the theory makes perfect sense. It holds that through the workings of the price mechanism, markets will eventually clear and stability will be restored.

In the case of worker shortages, employers simply need to increases wages enough, and before too long, they will be able to attract whatever workers they need either from the ranks of the voluntarily or involuntarily unemployed, or from competitors. Of course, the opposite is equally true. As long as workers are in over-supply, businesses can offer meager wages in full confidence that qualified workers and jobseekers will have no choice but to swallow them.

In other words, anyone believing in modern economics should recognize that manufacturers arent facing a chronic labor shortage. If they were, they wouldnt be cutting wages. Instead, they face a shortage of workers willing to accept the paltry wages they have been offered. How paltry? The latest figures from the U.S. Department of Labor show that after peaking in1978 yes, 28 years ago, inflation-adjusted wages for manufacturing workers have fallen back to levels they first hit in 1972.

Of course, the policy whizzes at the NAM have an explanation. As stated by Jerry Jasinowski, the organizations former president and how head of its Manufacturing Institute, the stagnating wage figures are much less important than the increasingly lavish benefits received by the typical manufacturing worker. NAM Chief Economist David Huether has added that, since 2000, wages have fallen from 84 percent of total manufacturing compensation to 80 percent, with growing health care costs the main reason.

But do these NAM bigwigs really mean to suggest that industrial workers are making out like bandits as a result pocketing most or all of the higher health care payments to boost their real living standards? Surely, Jasinowski and Huether know that todays health care costs are eating up the benefit payments meaning that workers other needs and wants have to be paid for by their shrinking wages, or by more borrowing. And surely these NAM experts know that the multinational outsourcers that dominate their organizations leadership, along with so many other companies, are starting to reduce the absolute levels of these non-wage benefits. Again, companies really facing a labor shortage would be doing just the opposite.

In addition, everything known about the dominant trends in the U.S. labor market clashes with claims of chronic labor shortages. For example, Secretary of Labor Elaine Chao has echoed the outsourcers claims of shortages of skilled labor, of lots of great jobs going begging, and of greater shortages looming ahead.

But she clearly hasnt read her own Departments latest projections of national workforce trends. They anticipate that nearly 40 percent of the new jobs that will have been created between 2004 and 2014 in the economy's fastest-growing occupations will require only short-term or moderate-term on-the-job training i.e., no post-secondary school at all. Moreover, another 9 percent of these jobs will only require a two-year (Associates) degree. The predominance of jobs lacking B.A. requirements is even greater in those professions that will remain America's largest employers in absolute terms. This sounds more like a Wal-Mart-centric economy than a technology-centric economy.

And heres a result that made me, for one, laugh out loud: These Labor Department projections do indeed generally show that the more training a job requires, the higher the pay. But do you know what the Labor Department considers very high pay its highest pay category? A grand total of $43,600 in total annual earnings. Not exactly a high bar.

In fact, theres only one sector of the economy that could plausibly be suffering a genuine shortage of skilled labor. The NAM report found that small employers are slightly less likely than large employers to report shortages. But this claim conflicts not only with anecdotal evidence Ive run across recently, but common sense.

Some smaller manufacturers Ive met over the last year say that business has recovered since the recession, and theyre once again hiring. But they feel victimized by two related problems. First, their margins have been squeezed relentlessly by their bigger manufacturers they supply, who keep threatening to turn to Chinese suppliers if the little guys dont match Chinese costs. Therefore, smaller companies are struggling to generate the earnings they need to offer workers higher wages. Second, some little guys observe that the skilled workers they laid off during the last recession arent returning to compete for their old jobs. One possible explanation: These missing workers fear another round of layoffs, and are sacrificing pay for greater job security.

Many multinationals face price squeezes, too, but of course unlike a 20-worker machine shop in northeastern Ohio, they often can respond by offshoring to China. This option explains much of the record profits these companies have been earning profits that clearly arent being spent on attracting skilled workers with better pay offers, or on training existing workers.

Its clear, then, that most labor shortage claims are simply meant to justify the multinationals continued resort to the low-wage strategy to greater short-term profits, either through offshoring jobs and production, or through flooding the U.S. labor market with immigrants. But give credit to the outsourcing lobby its not only pressing on, but has added a new twist to their argument: The outsourcers are turning up skilled-labor shortages in China and India, too, according to numerous news reports like the January 4 Wall Street Journal item titled Indias Talent Pool Drying Up.

Apparently even most university graduates from two Asian giants with science and technology degrees lack the qualifications multinationals say they need. The reason? The higher education in these countries varies wildly in quality, and often badly lags American standards. One big difference between the Asian situation and the American, however, is that the outsourcers have been bidding up wages abroad for the all-stars theyre seeking though their pay is still orders of magnitude lower than U.S. levels.

Luckily for them, even lower-wage countries like the Philippines, Russia, and Vietnam are beckoning. So before too long, look for wages for skilled labor worldwide to resume falling. I cant help but wonder how the outsourcers will sell their products when every major world population is becoming steadily pauperized. Presumably, theyll cross that bridge when they come to it.

Alan Tonelson is a Research Fellow at the U.S. Business & Industry Educational Foundation and the author of The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards (Westview Press)