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Zero Wage Expansion Is A Result Of Technology And Over-Financialization
by Gary D. Halbert
Seth Klarman: Investors Always Need A Strategy To Guide Them
"Many investors lack a strategy that equips them to deal with a rise in volatility and declining markets," Seth Klarman told his audience in a speech at MIT in 2012. Q3 2020 hedge fund letters, conferences and more Klarman was talking about the benefits of having a strategy, such as value investing, to provide a Read More
July 4, 2017
- Record 6 Million Unfilled Jobs – Yet 6.8 Million Can’t Find Jobs
- Do We Have a Labor Shortage in the US? In Skilled Labor, Yes
- Near-Term Labor Shortages Are Actually a Sign of Progress
The US Department of Labor told us in June that there were apprx. 6.0 million open (unfilled) jobs in America, a record high. The Labor Department also told us that there are apprx. 6.8 million unemployed Americans who are actively looking for work.
With those two figures in hand, you might wonder why there is a “jobs” problem at all. You might think that 6 million of the 6.8 million looking for work would snap up those 6 million unfilled jobs. But then you would probably realize that many of the 6 million unfilled jobs are not located where the 6.8 million looking for work are located. That’s part of the problem.
Yet the biggest problem by far is this: Many of the 6.8 million Americans looking for work do not possess the skills required to do most of the 6.0 million unfilled jobs. For a variety of reasons, many jobless Americans lack the skills necessary to do today’s unfilled jobs.
This fact is at the heart of our sluggish economy, and there are no easy answers. That’s what we’ll talk about today.
Record 6 Million Unfilled Jobs - Yet 6.8 Million Can’t Find Jobs
America has more job openings than ever before. There were 6 million unfilled jobs in the United States in April, a record high, according to data released by the US Labor Department in late June. It comes at a time when 6.8 million unemployed Americans are looking for jobs.
With a similar amount of job openings and unemployed workers looking for work, it may make one wonder why those unemployed workers aren’t able to find jobs. This is especially puzzling given that the official unemployment rate is at a 16-year low of 4.3%.
Source: US Department of Labor
Yet a further look into the unemployment data reveals one of the key problems that has increasingly plagued the US labor market in recent years.
First and foremost, job seekers tend to lack the skills in demand by today’s employers. Second, those seeking work are increasingly unwilling (or financially unable) to move to where jobs are available. And third, employers have often unrealistic expectations.
During and after the Great Recession of 2007-2009, employers had the upper hand and could be choosy about who they hired because unemployment was high and openings were scarce. They could raise job application requirements like asking for a college degree, even if the job didn’t necessarily require one.
For example, 65% of recent job postings for secretaries who work for executives (now known as “administrative assistants”) required a college degree. Yet among current executive assistants, only 19% have college degrees, according to a recent Harvard Business School survey. That’s a big gap between expectations and reality.
But most importantly, the US has long struggled with a job skills gap, which is a result of an aging workforce, the rapid pace of automation and a lack of effective job training programs. The sad fact is that most Americans looking for work today do not have the skills they need to fill open jobs in their area.
Along this line, it also depends on location and the type of job. In April of this year (latest data available), there were 2.1 million open jobs in the Southeast United States, the most of any region. By comparison, the most densely populated Northeast had the fewest number of job openings, 1.2 million, of any region.
On top of that, openings vary by industry. Manufacturing and mining job openings declined in April, whereas construction job openings were up. Openings in business services were down a bit in April while those in health care rose. However, those two industries far outpaced others in job openings, with 1.1 million each. Yet they also both tend to require a bachelor or associate’s degree.
Let’s move on to the bigger question that is being debated in America today.
Do We Have a Labor Shortage in the US? Skilled Labor, Yes
The US labor market has changed dramatically in the last 10-15 years. Pretty much gone are the days of a secure corporate job, early retirement and pension that paid you 70-80% of your salary for life. Those days are in the past for most workers today -- unless they work for the government.
The good news for employees is that market power is slowly swinging from employers to workers. The supply of skilled new workers is meager, barely offsetting the loss of retiring Baby Boomers, as noted above. Let’s look at the numbers.
From 1950 to 2016, the US labor force (the number of workers multiplied by their hours on the job) grew an average of 1.4% a year, reports the Congressional Budget Office (CBO). Now the CBO projects annual growth of only 0.5%, about a third of the post-1950 average.
Second, the business cycle compounds this effect. The latest US unemployment rate, at 4.3%, is at its lowest in 16 years, and there are some places where the unemployment rate is 2%. Still, about 5.5 million people say they’d like work but are not counted in the labor force because they haven’t been job-hunting recently.
If companies compete fiercely for scarce employees, workers should benefit. Companies would increase wages and benefits or risk losing their best employees to firms with more generous compensation packages. The labor share of the economy -- that is, workers’ earnings as a share of the economy’s total production (gross domestic product) -- would rise.
Yet between 2000 and 2012, the labor share of the economy fell from 63% to 57% of GDP, when it should have been rising. Since then, it’s only edged up to 58%; that’s hardly evidence of a shift in bargaining leverage on the part of workers.
Other outcomes are possible. Companies might raise labor costs and then pay for the increases by boosting prices. In that case, to prevent the economy from overheating through higher inflation, the Federal Reserve might then tighten credit more than is now expected.
The danger in that scenario is a premature recession. It would be better if competitive markets impeded firms from passing higher labor costs through to prices. Companies would have to absorb the cost of wage increases through business efficiencies (i.e. – higher productivity) or thinner profit margins.
It is impossible to know which of these possibilities -- or some variant -- will actually occur. But the larger point is that the looming worker “shortage,” which is often presented as a problem, is also an opportunity.
We need a new model -- a set of widely-held expectations -- to improve relations between firms and workers (or, put differently, between capital and labor). Workers need more training, as well as higher pay. But the model should be formed mostly by common sense and market realities, not government regulations.
Even with its slight recovery, the labor share of national income is too low. The beauty of the present moment is that what workers want and what companies need are converging. The steps that corporate managers and business owners might take to help workers are increasingly becoming a matter of necessity.
Near-Term Labor Shortages Are Actually a Sign of Progress
Our biggest economic problem today is the mismatch between the skills many people have and the skills today’s marketplace requires. Capitalism is a dynamic process, constantly shedding jobs, industries and ways of producing wealth -- and generating new products, services and ways of providing them.
People need to be able to evolve in terms of training to match those changes. So the truth is, what is needed is not more low and medium-skill jobs but more highly-skilled workers. Here’s a good example:
At the beginning of the 20th century, over 40% of Americans worked in agriculture. By the end of the century, it was just 2%. Many who were driven by a changing economy from farms to cities no doubt felt threatened. But largely because we no longer required nearly half the population to produce our food supply, labor was freed up to meet the needs of the changing economy.
Many, especially the mainstream media, don’t understand the real labor problem. The big shift in work is not so much about jobs leaving the US for Mexico or China, as the media would have us believe. Instead it’s from low and medium-skilled workers losing their jobs to software, 3D printing, robots and other new technologies.
The US economy lost about 5.6 million manufacturing jobs between 2000 and 2010 according to the Labor Department. Yet 85% of those job losses were the result of technological change, according to a study by the Center for Business and Economic Research at Ball State University.
Manufacturing companies are simply producing more goods with fewer people, as technological progress makes some skills redundant while generating demand for others. At Kodak, for example, a machine now mixes filmmaking ingredients with precision; 10 years ago, it took 14 workers to do the job.
When Subaru opened a plant in Lafayette, Indiana in 1989, most every weld on a car was done by a human being, and the plant produced 88 cars a day. Today, 28 years later, the welding is performed by robots, and the plant produces 1350 cars a day.
We constantly become more productive, but not by working harder. Most people work as hard as possible. Today, we become more productive by leveraging technology. By efficiently deploying capital, our economy is displacing repetitive semi-skill and low-skill jobs with high-skill jobs that leverage technology, education and training -- and increase productivity.
Our biggest economic problem is not a shortage of jobs, but a shortage of people with the skills to fill them. Over the next decade, an estimated 3.4 million workers will be needed to fill manufacturing jobs alone because of Baby Boomers’ retirement and economic growth. But 20% are likely to be unfilled due to a shortage of workers with the required skills.
The so-called “creative destruction” that characterizes capitalism eliminates manual jobs and creates new ones by deploying technology. It eliminates jobs in sunset industries only to generate new ones in sunrise industries. Many are alarmed by the process, but it is not a new one; rather, it is one of the most important ways capitalism fosters change and growth.
Ultimately, efforts to bridge the gap between employers and people who need work must include better training. The question is, how do we do it? I am one who strongly believes that we should reintroduce vocational training in our high schools to give all students practical skills they can use in life -- regardless of whether they go on to college or not.
That, of course, is a whole different topic which I’ll save for another day.
Wishing you a great 4th of July,
Gary D. Halbert
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