By: Nadir Al Kharusi

This is the third installment of our blog series – “Eye on the Economy, Part Three: Exploring the Skills Gap.” In the second part of the series, we took a look at Seattle economy after raising the minimum wage.

In 2017, the US secretary of Labor, Alexander Acosta said “The U.S faces a serious skills gap,” pointing to six million vacant jobs and millions of Americans who are not able to find a job. But how do we define a skills gap? Is it enough to point to job openings and the number of job seekers as evidence of a skills gap?

In this final part of our series, we explore the notion of a growing skills gap in the U.S., and the alarm that has been sounded by businesses, government and the media.

Before taking an in-depth look into the “skills gap” itself, we must acknowledge that industries and occupations are changing rapidly. There is an increasing demand for newer skills, and employers are looking for every possible edge over their competitors. This means that firms are sometimes less willing to share their hiring plans. Communication between employers and education institutions is often fragmented, which means educators don’t always understand the hard and soft skills that employers demand in advance, in order to adjust their programs to better fit the market demand sand benefit students as well as businesses.

The skill gap is defined as the difference between skills demanded to perform a job and the skills possessed by the person supposed to complete the job at hand.  There is no standardized metric to measure the gap; it is dependent on what the employer thinks is necessary to perform a specific job. The same job at different firms within the same industry can have very different requirements depending on who is assessing the needed minimal skills to perform the job. So is the skills gap real, or is it a blame game to shift the burden and cost of training workers from employers to governments?

A 2018  survey of 39,195 employers across the globe found that 45 percent of employers say they have issues finding applicants with the right set of skills. A Harvard Business Review article titled, Employers Aren’t Just Whining – the ‘Skills Gap’ Is Real suggests that the difference in income growth between different percentile earners is because top earners are learning valuable skills, implying that median American workers did not improve their skills and therefore should not expect raise in their wages. This argument is a variation of the old trope that if you work hard, you can achieve the American dream.

Let’s examine the claim that some workers earn more because they are more skilled. According to Jonathon Rothwell, Principal Economist at Gallup, software development jobs in Silicon Valley require more specialized coding skills than software development jobs in Louisville or even New York City, and due to that, software developers in Silicon Valley have a higher wage premium than software developers elsewhere – those software developers in Silicon Valley have a median wage of $131,270 due to their high skills that are in short supply. At face value, that might seem like evidence that supports the argument that a gap exists because some workers are unable or unwilling to gain in-demand skills. However, taking a second look on this piece of evidence, it is not far-fetched to believe that one of the world’s centers for software and technological development, Silicon Valley, would have different skills requirements than a software development job in an economy that does not specialize in software or technology such as Louisville or New York City. In fact, Rothwell’s analysis finds that “the average vacancy requires higher value skills in San Jose than almost any other metropolitan area.” In other words, San Jose’s highly specialized economy is not comparable with tech jobs elsewhere in the country.

Paul Krugman suggests that the skills gap is not supported by evidence, calling it a “zombie idea.” Krugman calls into question the methodology of some employer surveys, notes the influence of media outlets as perpetuating the skills gap myth, and questions whether employers are really willing to offer higher wages to attract the talent they need. Crucially, Krugman points out that unemployment is higher among workers at all levels of education than before the financial crisis, and that if there were a skills gap, workers with in-demand skills would do well while others would not. Instead, wages and employment remain stagnant.

The evidence is clear: wages of the top 10% of earners have grown since the 1980s, as illustrated in the graph below, while the majority of wages have remained stagnant or fallen.

 

As the graph above illustrates, the income of 90th percentile earners did indeed grow in the past ten years, while for median earners and below it had dropped. Does this mean that the skills and education of median Americans decreased over the years? On the contrary. Productivity growth has been larger than compensation growth in the majority of industries. The official Bureau of Labor Statistics (BLS) definition of compensation includes all workers and does not exclude the top earner within each industry. If anything, this downsizes the compensation-productivity gap for the median worker.

It is no doubt that a portion of productivity is generated by the top earners and their compensation should reflect that, but the difference between CEOs compensation relative to the median worker is far too great to be contributed to differences in the output alone. If we were to omit compensation to the top earners and observed the real compensation for median workers using BLS definition, we would get a more accurate representation of what is happening to the median American worker.

There are a few recommendations to understand the more nuanced reality of what’s happening in the economy.

  • To truly understand the local economy and make informed policy decisions, local governments may wish to conduct more focused analysis on the local demand for labor, and the training and higher education opportunities for potential employees. Surveys and studies of the local economy should include the perspectives of multiple actors, including people who are in and disconnected from the labor market; employers; educators; businesses; and anyone investing in job training and education.
  • Local leaders should work with industry to understand which highly specialized skills are in-demand now, and which skills will be in-demand in the future. As technology continues develop at an accelerated rate relative to previous decades, this demand will shift. It’s important to keep in mind that trends like increased demand for highly specialized skills in certain industries or parts of the country, and higher wages for workers with those skills, are not necessarily representative of the labor force as a whole, and do not explain the overall wage stagnation observed.
  • Communities should work to encourage data sharing and open communication among employers, educators, and training programs to ensure that workers have the skills that employers demand.
  • BLS may wish to develop a standardized way to measure skills, especially in new fields that have only come into existence within the past decade.

To learn more about the economic mobility work of the Center for Applied Public Research, please click here.