Almost Six Million Unfilled Job Openings In America – Question Is Why?
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 13, 2016
- Two Worrisome Economic Reports & A Pleasant Surprise
- Record 5.9 Million Unfilled Job Openings in July – Why?
- Many Workers Don’t Have the Skills to Do Today’s Jobs
- Manufacturers Increasingly Demand Higher Educated Workers
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On Wednesday of last week, the Labor Department’s Bureau of Labor Statistics (BLS) reported that there were a record 5.9 million unfilled job openings in America as of the end of July. Unless you are a news junkie like myself, this number may well come as a surprise to you. And the reasons why we have such a huge number of unfilled jobs may also come as a surprise.
With our official unemployment rate at 4.9%, we know that the labor markets have improved significantly in recent years. It’s great that US businesses are hiring, but these record numbers of job openings are also a sign that business owners can’t find the skilled workers qualified to fill the jobs they have available. We’ll find out why as we go along today.
Before we get to that discussion, let’s briefly review two decidedly disappointing reports for August – the ISM Manufacturing Index and the ISM Services Index. We’ll also look at another key report which significantly surprised on the upside. Let’s get started.
Two Worrisome Economic Reports & A Pleasant Surprise
The US factory sector retrenched in August, highlighting manufacturers’ struggles and a broader drag on the economy from weak business spending and an uncertain global outlook. The Institute for Supply Management’s (ISM) Index of manufacturing activity fell to 49.4 in August from 52.6 in July. The pre-report consensus was for a reading of 52.2, so this report was a big disappointment.
A reading above 50 in the ISM Index indicates factory activity is expanding, while a reading below 50 signals contraction/recession.
The latest indicator from the manufacturing sector is also a reminder of the many mixed signals from an economy stuck in a low-growth trajectory. Thursday’s report showed the ISM Indexes for new orders, production and employment all in contraction.
Then last Tuesday, the ISM Services Index for August plunged from 55.5 in July to 51.4 last month. That was well below the pre-report consensus of 54.7. While this much-watched non-manufacturing index is still above 50, it’s not by much and headed in the wrong direction.
These two very disappointing reports alone should be enough to ensure that the Fed does not hike interest rates at the September 20-21 FOMC meeting. Yet despite this news, several Fed officials made hawkish comments last week suggesting that a rate hike is still on the table for this month. My view remains that the FOMC will not raise the Fed Funds rate next week.
Now for the good news. The Conference Board reported that its Consumer Confidence Index vaulted from 96.7 in July to 101.1 in August, an 11-month high. The pre-report consensus was for a slight rise to 97.0, so the latest reading is a very good sign for consumer spending and thus the economy.
Most forecasters I read still believe the economy has improved in the 3Q. Some are expecting a jump to 3% or more when we get the first 3Q GDP estimate in late October. I believe we will see some improvement, but I’m doubtful that the economy jumped from below 1% growth in the first half to 3+% in the 3Q.
Record 5.9 Million Unfilled Job Openings in July, How Come?
One of the labor market’s biggest mysteries just got deeper: The number of job openings available at the end of July climbed to a new record of 5.9 million. Such a high overall number of unfilled positions is both good and bad news. On one hand, it means employers are hiring more. At the worst part of the recession in 2009 there were only 2.3 million job openings.
Yet on the other hand, it is also a symptom of a growing problem in the US economy, where employers can’t find enough skilled workers to fill growing job openings they have available. Economists refer to this disparity as the “job skills gap,” and it’s a growing challenge.
The number of unemployed workers per job opening has fallen to 1.3, the lowest since 2001. About 300,000 fewer people are being hired each month on average this year compared with the pace reached in February. And during the entire economic recovery, the US has yet to post a single month of hiring that matches the pace seen at the heights of 2007 or the early 2000s.
The Job Openings and Labor Turnover Survey (known as “JOLTS”) is the Labor Department’s second monthly report on the labor market and provides details across demographic groups and across industries. The JOLTS report, released last Wednesday, only goes through July. Still, the report is an intriguing look into trends around job openings and the reason for job separations.
More people are being hired each month than are leaving jobs. That means the net number of jobs is increasing. But the pace of hiring and the pace of voluntary job-quitting are both lower than prerecession levels, a sign of a lack of vibrancy in the labor market. Because job-hopping is a key way that many Americans get raises, an increase in voluntary job-quitting tends to coincide with faster wage growth, but not so much this time around.
Many theories have been offered to explain the gap between job openings and actual hiring. The most likely is that workers lack the skills required for available jobs. Another is that available skilled workers and available jobs are in different parts of the country. Yet another is that employers have become more picky. All three play a role.
The debate is far from settled, and the JOLTS report doesn’t provide enough detail to reveal the definitive answer. It does, however, provide some useful insight into trends by industry. These show a sharp split that may help explain why many openings are going unfilled.
The number of job openings for professional and business services and for health and education services have reached new highs in recent years. The number of job openings in manufacturing and construction, by contrast, remain below their levels of a decade ago. This lends more support for the idea that openings are going unfilled because workers don’t have the right skills.
Many Workers Don’t Have the Skills to Do Today’s Jobs
As noted above, job openings at 5.9 million in July set a new all-time record. Yet despite all the anxiety we hear about disappearing factory jobs, the number of unfilled manufacturing jobs in July was at the highest level in recent years. So why are they still open?
Factory work has evolved over the past 15 years or so as companies have invested in advanced machinery requiring new skill sets. Many workers who were laid off in recent decades – as technology, globalization and recession wiped out lower-skilled jobs – don’t have the skills to do today’s jobs. The mismatch poses a problem for the economy, often limiting the ability of businesses to increase production which weighs down on growth.
As an example, let’s take Ohio resident Gary Miller who works in manufacturing. When he started at Ohio-based Kyocera Precision Tools Inc. in 1989, it employed 550 production workers. Since then it has shed half of its workers; yet it now produces twice as much, thanks to higher-skilled employees and equipment such as computer-controlled machine tools, which cost as much as $500,000 each.
Mr. Miller, who is now the company’s director of training, struggles to find technicians with the electrical and mechanical skills needed to operate and maintain the complex machines. One electrical maintenance job went unfilled for over a year as he searched for someone with an associate’s or bachelor’s diploma in manufacturing engineering.
Manufacturers Increasingly Demand Higher Educated Workers
Miller’s problems are mirrored across the country. Openings for manufacturing jobs this year have averaged 353,000 a month, up from 311,000 in 2015 and 122,000 in 2009.
As manufacturing has become more technology-driven, its share of managers and professionals has risen, according to the Labor Department. In 2000, 53% of manufacturing workers had no education past high school. By 2015, that share had fallen to 44%, while the share with college or graduate degrees increased 8%.
Research-intensive sectors, such as pharmaceutical or aerospace manufacturing, often seek candidates with science or engineering degrees. Other hard-to-fill roles are middle-skill positions, such as maintenance technicians that require more education or training beyond high school, like a trade school or courses at community colleges.
The “upskilling” in the manufacturing sector mirrors a broader bias in the economy toward more educated workers. This year, college-educated workers for the first time outnumber workers with a high-school diploma or less, according to a study by Georgetown University’s Center on Education and the Workforce.
Companies say education and training systems haven’t evolved alongside industry needs. As manufacturing lost jobs to technology and outsourcing, young people pursued college degrees or jobs in the growing services sector. Many colleges and high schools have reduced their focus on technical education.
Eight in 10 manufacturing executives said the expanding skills gap will affect their ability to keep up with customer demand, according to a late 2015 survey by Deloitte and the Manufacturing Institute, an industry-backed nonprofit. The study found it takes an average of 94 days to recruit for highly-skilled roles such as scientist or engineer, and 70 days for skilled production workers.
Some suggest that the solution to the skills gap is for companies to simply pay more. But the opportunities aren’t even across the manufacturing landscape. Sectors with high-margin products, such as pharmaceutical or medical device manufacturing, can often afford to pay more than makers of more traditional manufactured goods such as heavy machinery.
The bottom line: our economy is becoming more high-tech by the day. Industries that are shedding jobs, by and large, are terminating lower-skilled workers who then have trouble finding comparable jobs for the same reasons. The shortage of skilled workers explains why we had record-large job openings of 5.9 million in July.
It also does not help, as I wrote last week, that 8-10 million working-age males (25-54) have disappeared from the workforce for reasons that are not entirely understood. Add that to the problems discussed above, and it is very hard to get economic growth back to the 3-4% level.
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Wishing you a great end of summer,
Gary D. Halbert