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Whose skills shortage - workers or management?

An oft-stated goal of the Clinton administration is the generation of high-skill, high-wage jobs for workers. Reflecting this, the administration has echoed the increasingly common belief in the need for more "high-performance" workplaces, where workers with advanced skills can be utilized to boost productivity and, therefore, wages. At the same time, many have asserted that the United States faces a serious skills shortage, due to a rapid escalation in the knowledge requirements of jobs, which is outstripping the poor educational preparation of U.S. workers. The juxtaposition of these views has led many to conclude that an insufficiently educated work force is now a major constraint to a more high-performance economy. They maintain that there is a "skills mismatch" between available jobs and available workers and that it is hampering productivity and wage growth. Their conclusion: A work force with better skills is needed to move the country along the "high-skill, high-wage path."

This thinking represents a "field of dreams" approach to the jobs issue: "If we build the workers, jobs will come." That is, improving the work force will produce high-performance workplaces, then substantial increases in productivity, then high-wage economic growth, and so on.

We believe that this approach is mistaken. In reality, the main obstacles to attaining high-performance workplaces are management myopia and fear of empowering workers; the lack of significant wage pressure; the eagerness of executives to pursue low-wage options such as offshore production and to depress wages, benefits, and working conditions; and a variety of institutional barriers to any change.

The view that U.S. workers are ill-prepared to support a highly productive workplace and that improving education is the key to boosting national competitiveness, has become well entrenched in government and industry, but it is wrongheaded. As we will show, the evidence does not indicate a skills shortage or skills mismatch. If anything, it suggests a "management shortage," that is, a paucity of business executives who are willing to transform workplaces in a way that will allow skilled workers to be more productive. This country has used "dumb workers" and "poor schools" as scapegoats for too long. The debate on how to improve productivity must be redirected to focus attention on the real issue.

Smarter workers

A fundamental problem with the skills-shortage argument is that work-force skill levels actually have been rising rapidly. For example, the educational attainment level of the work force has improved steadily over the past two decades (see figure 1). In 1973, only 75 percent of the labor force had finished high school. By 1991, that figure had risen to 87 percent, cutting the proportion of high school dropouts in the work force by half. In similar fashion, in 1973 only 16 percent of the work force had graduated from college. By 1991, that figure had risen to almost 24 percent.

But couldn't educational quality (as indicated by test scores) have fallen while education levels were rising? To test whether this was the case, we turned to the National Assessment of Educational Progress (NAEP), which measures the cognitive achievement levels of U.S. students. NAEP rates achievement on a scale of 0 to 500 by comparing student responses to standard test questions over time; the vast majority of high school students score between 225 and 375. From the early 1970s to the present, NAEP scores for 17-year-olds have fluctuated only a few points, indicating that the achievement of high school seniors has remained very stable over the past 20 years.

The only exception to the pattern of stable test scores is that blacks have exhibited a notable improvement in mathematics and writing. Thus, skill trends among minority work-force entrants, far from being a special source of concern, should properly be viewed as a special source of strength.

A lack of smart jobs

The fact that test scores of high school graduates have remained stable while education levels have risen means that the intellectual capabilities of the work force have increased substantially over the past two decades. Thus, if there is a skills shortage, it could be attributable only to a rapid rise in the skill requirements of jobs, for which even the increased supply of more educated workers has not been adequate.

There are two ways to look for proof of such a trend. The first is to examine direct evidence--survey or case-study data on changes in the job structure. The second is to indirectly infer such changes by examining patterns in wage data, which would show the existence of an increased "skill premium."

Changes in the job structure can affect job skill levels in two ways: through compositional shifts in the job structure (changes in the job mix) and through content shifts, in which the nature of the work that individuals must do within certain jobs changes. For example, change can occur in the proportion of bank tellers within the economy or in the kind of work bank tellers do.

The changing job mix does not necessitate much higher skills. To investigate the effect of changes in job mix, we analyzed data on 23 industries and 23 occupations from the U.S. Census, the annual Current Population Survey, and the Bureau of Labor Statistics. We found that although skill requirements are rising in response to a changing job mix, they are rising at a progressively slower pace. Furthermore, the rate of up-skilling of the job structure should continue at a slow rate into the next century, based on employment projections by the Bureau of Labor Statistics through the year 2005.

For example, required job-skill levels as measured by a verbal aptitude index went up at a 10-year average rate of 2.3 percent between 1970 and 1979, but only 0.9 percent between 1980 and 1990. Similarly, the requirement for data-handling skills went up at a rate of 4.1 percent between 1970 and 1979, but just 1.9 percent from 1980 to 1990. The other skill and education measures tracked by these sources show a similar pattern of modest rates of change in the 1970s, followed by a deceleration in the 1980s.

The projected rates of growth in skill requirements from 1990 to 2005 are also far less than those of the 1970s, and are even slightly less than those of the 1980s. This isn't to say that in certain industries skill requirements will not increase sharply, but when viewing the economy as a whole, demand for higher skills is barely increasing. The bottom line is clear: Future demand for higher skills is projected to be anemic--the very antithesis of the explosion in high-skill jobs postulated by the skills-shortage viewpoint.

Changing job content will not dramatically increase required skills. If shifts in the composition of employment are not generating significantly greater demand for higher skills, then any need to substantially upgrade skills must stem from changes within the content of jobs performed.

There are three sources of evidence to consider: case studies of jobs within particular industries; employer surveys, in which employers are asked to assess the skill requirements of jobs within their firms; and worker observation, in which analysts watch work being performed and determine the skills required.

In the case-study literature, the message concerning the direction and magnitude of change within occupations is ambiguous. For instance, there is no direct relationship between technological progress and skill upgrading. The change in job content due to the introduction of a given technology varies from large increases in skill levels to small increases to no change or even downgrading. For example, a 1986 study by Ramchandran Jaikamur at the Harvard Business School showed that, during the previous decade, U.S. companies had used flexible manufacturing technologies primarily to produce small numbers of parts at high volume, which required a low-skill mix of workers and little worker training. In contrast, Japanese companies had used the technology to create many custom-designed parts at low volume, necessitating a high-skill mix of workers and extensive worker training.

The picture does not clear up when we turn to evidence from employer surveys. To begin with, the surveys consistently show that employers are most strongly interested in worker attitudes, not cognitive skills. When employers are asked what they are most likely to look for in prospective hires, they typically stress finding workers who are "reliable" and have "a good work ethic" and "a good attitude," rather than knowledge of statistics or even basic math. In 1990, the National Center on Education and the Economy's Commission on the Skills of the American Workforce put the share of employers with this emphasis at about 80 percent, compared with only 5 percent who emphasized growing educational skill needs.

That figure is of considerable interest. It suggests that the proportion of employers who have insituated "high-performance work organizations"--which would presumably call for greater worker skills--may be small. Consistent with this, the 1991 report of the Secretary of Labor's Commission on the Achievement of Necessary Skills put the proportion of employers who have reorganized work in this way at only about 10 percent.

Other estimates are rosier. A study done this year by Paul Osterman at MIT's Sloan School of Management, based on a careful and representative survey of 875 firms, puts the proportion of employers (with 50 workers or more) that utilize high-performance work organization at a comparatively robust 37 percent. However, Osterman's figure includes employers that identified with only two of four somewhat vague work-organization concepts (job rotation, self-directed work teams, problem-solving/quality circles, and total quality management). But some firms might have been credited with applying just two of these concepts--for example, problem-solving/quality circles and total quality management--on the basis of little more than minor employee involvement in problem-solving and quality control, hardly a sufficient prescription for high-performance work. If we ratchet up the definition of high-performance work organization to require three of the four concepts, only 13 percent of the companies responding would qualify, based on Osterman's own data.

Employer surveys, therefore, also do not paint a picture of job transformation that is consistent with the skills-shortage hypothesis. The data are consistent with modest skill upgrading, not dramatic change in job content.

That leaves us with the last, and most direct, measure of job content changes--observation by job analysts of actual job-skill requirements. Only two recent analyses of such data have been made, one by Peter Cappelli at the University of Pennsylvania, and one by ourselves.

Cappelli's study uses data from the Hay compensation consulting firm, which rates the skill requirements of jobs at a nonrandom sample of U.S. firms for various clients. This somewhat idiosyncratic data set does suggest some skill upgrading between 1978 and 1988, but only within production jobs in manufacturing. Data on clerical jobs across industries (the other category Cappelli examined) indicate no net upgrading. Although some clerical jobs have become more complex, others, such as those of office-equipment operators and personal secretaries, have been routinized or reduced in scope.

The best source of data on the skill content of jobs is the Dictionary of Occupational Titles, a rating by the Department of Labor of more than 12,000 U.S. jobs. By painstakingly matching the original 4th edition, released in 1977, and its revision, published in 1991, we isolated more than 1,600 jobs that were rerated by job analysts over the intervening years.

The results are perhaps the most reliable evidence currently available on changes in job content. The data clearly do not suggest massive upgrading within jobs. Indeed, they suggest much the same sort of modest job upgrading indicated in the other analyses. Our study shows that the educational development requirement in language ability rose only 2.8 percent from 1977 to 1991. The educational-development requirement in mathematics rose at a 10-year rate of only 1.7 percent, and requirements for specific vocational preparation, data-handling ability, and interpersonal skills were virtually flat or even very slightly diminished.

The conclusion is inescapable. Direct evidence on changes in job skill requirements indicates that the skills-shortage thesis considerably exaggerates the limited upgrading actually happening in contemporary workplaces. Instead, the evidence suggests that the job structure is changing rather slowly and irregularly. Thus, we are left with only one other source of proof that there may be a rapid rise in the skill requirements of jobs--patterns in wage data that would show the existence of an increased "skill premium."

The non-college-educated are earning less. The crux of many economists' arguments about a skills shortage is that wage trends show that skill was rewarded handsomely during the 1980s. No need to look at the direct evidence, they say; this indirect evidence shows conclusively that skill requirements are rising. No other possibility would be consistent with the premium revealed by analysis of wage data.

The data show that the wages of more-educated workers (defined as college graduates) have increased relative to those of less-educated workers (high school graduates). That we do not dispute. All observers agree that there was a substantial increase in the wage gap between college and high school graduates in the 1980s (though the increase flattened late in the decade).

But the assumed link between this trend and increases in average skill requirements is very much open to question. The point to remember is that the wage gap, the "wage return to education," is a relative indicator. For example, a substantial down-skilling of the bottom half of the job structure would increase the economic return to education (because the wages of workers with little education would decrease relative to those of well-educated workers) while reducing job skill requirements.

Significantly, the relative return to education for men increased in the 1980s almost entirely because of declining wages for the non-college-educated workers, not because of increasing wages for the better educated workers (see figure 2). In real dollars, wages for high school graduates dropped 12.7 percent from 1979 to 1989, while wages for college graduates rose only 0.2 percent during the same period. Thus, the wages of more highly skilled workers have not been bid up, as one might expect in a skills shortage. Rather, the wages of the less-skilled have been pushed dramatically downward. Moreover, since 1987 the real wages of white-collar and college-educated workers have actually been declining, further complicating the story.

In addition, many empirical analyses suggest that the relative wages of the non-college-educated work force have been depressed by a host of forces that have no clear relationship to rising skill requirements in the workplace. These include the job shift toward lower-paying service industries, increased import competition, a lower minimum wage, and declining unionization. Skill upgrading was therefore only one of many causes for the rising return to education in the 1980s.

This is not to say that some part of the rise in returns to education cannot reasonably be ascribed to increasing skill requirements. But this is hardly enough to justify talk of a dramatic rise in skill requirements. Thus, conclusions made from wage data are quite consistent with the analysis offered earlier--that there has been only modest growth in skill requirements in recent years.

Policy implications

The skills-shortage thesis is intuitively pleasing: If more technology is making its way into the workplace, then workers must need higher skills to use it. It has particular appeal to business leaders because it shifts the blame for low productivity growth away from management practices and corporate strategy. Many policymakers are ready to believe it because it prescribes an easy fix, has populist appeal, doesn't cost much, and keeps government out of business's affairs. Unfortunately, the most politically palatable solution is often not the right one.

The evidence reviewed above casts considerable doubt on the skills-shortage diagnosis of this country's labor-market problems. Simply improving the supply of worker skills, although always desirable and necessary, will not by itself put U.S. industry on a high-wage, high-skill growth trajectory. Ways must be found for improving the demand side of the equation; companies must begin to restructure their operations to better utilize the skills already found in the work force--or those that may develop in the future.

This can be done. When we say that there is a management shortage, we do not mean a shortage of technically competent managers, just a shortage of initiative to implement needed changes in the workplace. Business leaders with a willingness to reform their practices will find a growing body of literature on how to do it.

Government's role is to focus on creating new relationship in the workplace and on making more companies aware of best-practice management techniques. This has already begun with the creation of a handful of manufacturing technology centers that address organizational problems as well as technological needs. Convinced of the value of these technology diffusion centers, President Clinton proposes increasing their number to more than 100.

To encourage action by management, initiatives such as these should, wherever possible, be used as levers to encourage the transformation of work systems. This might include making training grants and other assistance contingent on the adoption of human resource plans that lead to work reorganization and increased worker participation.

Technology diffusion programs reflect the "carrot" aspect of changing management practices--providing benefits if companies follow the "high road" to increased competitiveness. But it may also be necessary to block the "low road"--company policies that reduce wages and benefits, increase use of part-time and temporary workers, bust unions, and move work overseas--if widespread adoption of high-performance work organizations is desired. This means that government should consider policies on labor standards (such as the minimum wage and safety regulations), labor relations, and trade, which could inhibit the ability of employers to use low-road strategies. Possible specific actions include strengthening the collective bargaining system and negotiating tougher supplemental labor and environmental provisions to accompany the North American Free Trade Agreement.

Of course, since these kinds of policies will challenge business practices, they will be controversial. But focusing on the nonexistent skills shortage will not improve the performance of U.S. industry. We cannot provide a complete policy agenda for attaining a high-skill, high-wage economy. We can, however, state with certainty that the nation will never reach this goal unless it looks beyond worker skills to issues of work organization and management.
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Author:Teixeira, Ruy A.; Mishel, Lawrence
Publication:Issues in Science and Technology
Date:Jun 22, 1993
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