Reports of Skills Gap and Skills Shortages

Concerns about the supply of skills in the United States are hardly new. Their contemporary roots go back to the post-Sputnik 1958 National Defense Education Act, which increased funding for science and engineering education in an effort to compete with the Soviet Union. The idea that schools were failing became popular with the National Commission on Excellence in Education's 1983 report, A Nation at Risk. But during the 1980s and 1990s, the dominant view remained that providing job-related skills was the responsibility of employers.

Discussions in the 2000s changed direction sharply, beginning with the consultant-driven idea that the U.S. economy was facing an overall shortfall in the supply of labor. Despite the absence of any evidence, the Society of Human Resource Management reported that large numbers of employers were preparing for a labor shortage predicted by 2010.

More common than the overall-labor-shortage view was the idea that there would be a shortage of college-educated workers. The President's Council on Jobs and Competitiveness, a business-led group, claimed that the country would be short by 1.5 million graduates by 2020. Others narrowed their concerns to a projected shortfall of science, technology, engineering and math (STEM) graduates. The Department of Commerce concluded that the United States would need to expand both immigration and education to meet skills shortages in IT as early as 1997 – a conclusion that was almost immediately contradicted by what was then the U.S. General Accounting Office. No matter; the National Academy of Sciences produced six separate reports related to STEM-skills issues just in 2012, many about expanding the supply.

Few reports countered the skills-shortage idea. But those that did had the evidence on their side – pointing out, for example, the fallacy of assuming that every job using STEM skills required a STEM degree. In fact, few computer programmers have bachelor's degrees in computer science. Moreover, roughly half of recent engineering graduates do not take jobs as engineers, either because they cannot not find such jobs or because the ones offered pay less than alternatives in other fields. Many of the employer-based reports also offer contradictory evidence – for example, citing survey respondents who admit they are unwilling to offer wages that are high enough to attract the candidates they want.

Studies that survey recruiters rather than higher-level executives also reported something different than the skills-gap notion. Their consistent conclusion: any shortfalls in new graduates are related to poor workplace attitudes, not classroom skills – and those complaints haven't changed for decades.

Academic research on these questions, by contrast, has been sparse. Much of it focuses on the more general question of whether skills requirements are rising. Here, the consensus is that overall requirements have been trending upward in recent decades, albeit slowly. In 2006, Stephen Vaisey, a sociologist at Duke University who compared educational qualifications to the educational requirements of jobs, found that average American workers were overqualified for their jobs and that the degree of over-qualification had been increasing. Other studies found that the changes in skills requirements for the average U.S. job over the past 40 years have been small – and, most surprisingly, there has been no increase in STEM-skills requirements. Meanwhile, the evidence that individuals lose by being overqualified for their jobs is overwhelming, while the evidence that companies benefit from employing overqualified workers is modest at best.

A different set of claims asserts that the economy or the labor market has changed in ways that have altered the balance between the supply and demand of skills. Edward Lazear, an economics professor at the Stanford Business School, and James Spletzer, a Census Bureau economist, examined that argument and rejected it. Yet such claims continue to be made.

Among the most puzzling claims: the President's Council on Jobs and Competitiveness (among others) asserted that the presence of vacancies is evidence that jobs cannot be filled. The standard view, of course, is that vacancies prove only that time is required to post the job advertisement, collect applications, process them and hire someone. Deloitte, the consultants, claimed in 2011 (on behalf of the National Association of Manufacturers) that 600,000 good jobs in U.S. manufacturing couldn't be filled for lack of qualified applicants – an astonishing figure given that the Bureau of Labor Statistics found only 220,000 total vacancies in manufacturing during the year Deloitte made the estimate. By contrast, Paul Osterman at M.I.T. and Andrew Weaver at Indiana University recently found that two-thirds of manufacturing employers report no vacancies, and only one-quarter have had vacancies open long enough to suggest there was difficulty in filling them.

A different question, which gets closer to the heart of any skills question, is whether vacancies are taking longer to fill now than in the past. The Beveridge Curve offers indirect insights into the question by capturing the relationship between the unemployment rate and the number of job openings as a proportion of the labor force. Jobs that stay open get counted again in each estimate, so a change in the length of time required to fill jobs would cause an apparent outward shift in the curve.

Regis Barnichon and his colleagues at the Brookings Institution found that the Beveridge Curve did, indeed, shift after the Great Recession in 2009 and that the shift was caused by a decline in hires per vacancy expected at the relevant level of unemployment. Many factors could account for that decline, such as greater hiring of those already employed elsewhere (which generates no net employment gain) and a decline in filling vacancies from within (which expands the vacancy rate). Stephen J. Davis, an economist at the University of Chicago, and his colleagues, for their part, found that recruiting effort per vacancy has fallen. This change in the Beveridge Curve, the cause of which remains unclear, is, in the end, the best evidence that something has indeed changed in the labor market.

Among the most-cited evidence about the demand for skills is the finding that the difference in pay between the average college graduate and the average high school graduate has changed. That wage premium was rising in the 1980s even as the relative supply of college graduates rose, suggesting that there was a shift in demand toward more-skilled and more-educated workers.

But since the 1980s, evidence of a continuing shift has not been as compelling. Indeed, some studies conclude that the demand for skills that require college degrees is actually declining and that college graduates are forced to look to jobs that require less talent as a result. In the process, they bump the applicants without college degrees, who end up with even lower-skilled jobs or none at all.

On average, college graduates make more money than high school graduates, but what we make of that fact should be considered carefully. Because the premium represents the difference in average wages, it is not necessarily representative of the experience of new hires – nor predictive of the future college premium. And strikingly, the premium appears to have declined during the Great Recession, falling from 69 percent to 63 percent between 2008 and 2011.

College graduates are different from high school graduates in ways other than educational attainment, and those differences also affect the premium. It would be wrong to assume that typical high school graduates are identical to average college graduates except for education and that the former would make the same wage as the latter if they had college degrees. Yet that assertion is commonly made.

The college premium has also been influenced by factors that have nothing to do with the demand for college graduates. The decline of unions, for example, pushed wages down disproportionately for high school grads, thereby increasing the college premium from the other end. The education-mismatch literature also shows that the wage premium from a college degree comes mainly from getting access to jobs that require college-level skills. College graduates in jobs that require only high school skills earn little more than high school graduates doing the same work. In the eyes of coffee-shop managers, it seems that a barista is a barista, with or without a degree in civil engineering.

That should remind us of the fallacy of composition: it may make sense for an individual to secure a college degree in hope of snagging a job that requires college skills. Whether it makes sense for society as a whole to send a higher percentage of high school students on to college expecting that they will all earn that same premium is questionable.