Is it ‘where are the jobs’ or ‘where are the workers’?

The unemployment rate gets a lot of attention in the media and in public discussions as it relates to the labor market and overall economy.  In no way do I mean to discount the unemployment rate as a useful measure but I do think that it paints a limited picture of what might be happening inside of the labor market.

Whereas some might look at the unemployment rate and make automatic assumptions about how it translates into current economic conditions, I find myself asking whether the economic climate is a result of the unemployment rate or if the unemployment rate is borne out of the current economic climate.

Graph of U.S. Unemployment and GDPOf course, there is much interplay between both that contribute to the overall condition of the economy and unemployment rate.  But I am particularly interested in how a difficult hiring environment for business might be affecting growth, and hence the economy.

Businesses need several key ingredients to support growth.  Some of these ingredients include capital and a means to produce a product or service.  The means to produce a product or service can come in the form of actual labor or in the form of technology like software or machinery.

Capital does not seem to be a problem, as there is an unprecedented amount of cash floating around the economy seeking in earnest a place to call home.  The U.S. Federal Reserve, through it’s QE program, is proceeding with what I consider one of it’s most massive failures in the making.  That leaves labor.  How are businesses faring on finding labor with the skills needed to continue offering increasingly complex and sophisticated products and services?

Recently, I wrote about the JOLTS program at the Bureau of Labor Statistics.  If you have not read this I recommend you do, as it will provide a quick primer on this data.  There is one graph that I used in that post that I want to look at again.

Bureau of Labor Statistics: JOLTS Data (Monthly)

Bureau of Labor Statistics: JOLTS Data (Monthly)

I find this graph quite interesting, as it provides more details into what is going on within the labor market.  Lets start by looking at the trend in hires and openings.  As you can see, the rate of hires has grown 23% since hitting a low of 3.6 million in August of 2009.  The rate of openings has seen a 43% increase since reaching a low of 3.8 million in July of 2009.  As the data shows, the rate of openings has been growing significantly faster than the rate of hires.  Why? And what does this mean if the trend continues?

There has been a good deal of public discussion about whole industries having problems finding the talent they need even in the face of relatively high unemployment.  Robert J. Gordon recently wrote in the New York Times that “even in today’s lackluster labor market, employers still complain that they cannot find workers with the needed skills to operate complex modern computer-driven machinery“.  So while the unemployment rate, currently around 7%, seems to suggest to some that the economy is weak the JOLTS data suggests that companies are seeing openings continue to be unfilled.

So what is going on here?  We have 7% unemployment but openings continue to stay unfilled and increasing quarter over quarter.  There are four factors at play that I think are creating a perfect storm for businesses in the next few decades – inadequate and counterproductive talent search, recruitment and management methods, a lack of training and learning opportunities for today’s young workforce, the upcoming  ‘great crew change’ of Baby Boomers retiring en masse and leaving a large void of experience and wisdom, and lastly a considerable lack of strategy inside of corporate America to acknowledge what is happening and efforts to prepare for it.

Inadequate and counterproductive methods for searching, recruiting and managing talent

One possible explanation for companies finding it difficult to get the workers they need may be that they are imposing unrealistic expectations on themselves.  Chris Farrell with NPR’s Marketplace recently mentioned that he thinks software systems that screen applicants are working against business imperatives.  I think he is right.  HR departments may be relying too much on checking boxes off for different criteria and not spending enough time reviewing a candidate’s qualifications as a whole.  I think that this is partly due to the number of applicants that are received for any one position and the need to use software to filter out the best ones.  But if that is the case, then perhaps those filters need to be reconsidered.

A lack of training and learning opportunities for today’s young workforce

Another possible explanation could include the state of our young workforce in terms of their experience and readiness to ‘take the wheel’.  Take a look at the chart below to get a sense of the big picture view of what has been happening to the younger workforce since the early 80’s.

U.S. Employment Level (% by Age Group)

U.S. Employment Level (% by Age Group)

As you can see from the chart, the 16-24 age group has not fared well in the labor market since the early 80’s.  Over the last 30 years they have collectively lost roughly 10% of their position as a percentage of the labor market.  One has to consider the implications of fewer young workers participating in the labor market when the need for skilled workers is so great and will be more so going forward.

These young workers are not getting the opportunity to gain the valuable experience and knowledge that comes with being part of the workforce.  Tyler Cowen has written on this recently, saying that the “lack of jobs will damage the long-term careers of a big chunk of the next working generation“.  I agree with Mr. Cowen.  Cowen also makes a good point on the lack of training for those young workers that are in the labor market, saying that “employers appear to be more risk-averse, more concerned about overhead costs and less willing to invest in developing young workers’ skills“.  This is a short term strategy that I think will backfire in spades for those companies pursing this tack.  More on that later.

The upcoming  ‘great crew change’ of Baby Boomers retiring en masse and leaving a large void of experience and wisdom

This is something I have written about before and find interesting in it of itself.  Many industries are already experiencing the effect of the Boomers beginning to step out of the labor market.  This generation has accumulated a significant amount of experience and knowledge across a very broad spectrum of the economy and they still account for more than two thirds of the labor market.  What will happen when the pace of retirement really begins to pick up and gets into full swing?

I am going to include this chart again because I think it is quite prescient.  Pay particular attention to the ’55 & Older’ category.  This group has become the fastest growing portion of the labor market, increasing their position by about 10%.  Remember, that the 16-24 age group has lost as much during the same period.

U.S. Employment Level (% by Age Group) With Notes

U.S. Employment Level (% by Age Group) with Notes

What seems to be happening is that businesses are choosing to forego the long term benefits of investing in and developing a young talent pool and going instead for the low hanging fruit of experienced workers.  As Tyler Cowen mentioned in his New York Times article, “employers appear to be looking around for workers but then holding out for the very best candidates, and, if need be, making do with few new hires or none at all“.

What is going to happen when Boomers leave the workforce en mass and businesses have not prepared themselves?

A considerable lack of strategy inside of corporate America to acknowledge what is happening and efforts to prepare for it

Akio Morita, a co-founder of Sony, once said, “those companies that are most successful are those that have managed to create a shared sense of fate among all employees“, and that “the fate of your business is actually in the hands of the youngest recruit on the staff“.

If you have not read Morita’s book, Made in Japan, I highly recommend you do.  I would consider it one of the best management books ever written.  While it may have been written almost 30 years ago, the message is no less relevant and superbly written.  The quote I used above came from this book and while it has been more than 10 years since I first read it, that particular message has found a permanent place in my memory.  I find it that important.

What I am seeing in today’s labor market, with the data I’ve shown above, in the public discussions on this issue, and private conversations I have had with various folks, is a considerable lack of long term strategic thinking among corporate America and across many industries.  They see the problem, they acknowledge the problem, but they cannot seem to discipline themselves to do what is necessary to prepare.

Those young workers who are currently not participating in the workforce are precisely the ones that will be called upon in the coming decades to ‘take the wheel’ and those companies that have not prepared themselves will have done so presumably to their own detriment.  Talent management will become ever more a significant source of competitive advantage.

About Jose Velez

I received my degree in economics and finance from the University of Texas at Dallas School of Economic, Political and Policy Sciences in 2006. Since then I have worked within the energy industry focusing on regulatory and environmental issues.
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