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January 1, 2013

The Unskilled, the Underemployed and the Chronically Unemployed

An ominous cliff for the country

Other companies may be struggling in this tough economy, but California Steel Industries is holding its own. With demand for its metal pipes and flat-roll sheets still strong, the suburban Los Angeles, California, steelmaker announced plans last July to invest more than $100 million in a new mill producing welded pipes. But, if there is anything holding back California Steel, it’s that the company cannot find qualified craftsmen.

While an electrical technician at California Steel can earn north of $75,000 a year plus benefits, the company has struggled since last summer to fill 14 open slots for electrical and mechanical technicians. “It’s a challenge to find the right people,” says Brett Guge, the company’s executive vice president of finance. “And it’s not a steel problem—it’s a national problem.”

The struggle California Steel has faced represents the great paradox of the current economy: While U.S. unemployment remains stubbornly high, many manufacturers say there is a widening gap between the supply of career line-workers and the demand for workers with math skills to operate a robot or work with programmable logic controllers.

According to a 2011 study by the Manufacturing Institute and Deloitte, as many as 600,000 U.S. manufacturing jobs are going unfilled because of this dearth of qualified workers.

In a separate study by the Institute for Supply Management’s New York chapter, 23% of the businesses surveyed last September said the lack of skilled labor was affecting their ability to grow. That appears to be the case in the metals industry. According to the U.S. Bureau of Labor Statistics (BLS), the unemployment rate among workers in the primary and fabricated metal products sector declined to 6.3% in October 2012 versus 8% during the same period in 2011. Yet many industry executives say they can’t find enough workers with the skills they need. “There is absolutely no doubt that we have a skilled worker shortage,” says Darlene Miller, CEO of Permac Industries, a precision machining company in Burnsville, Minnesota.

To be sure, some experts believe that a large part of the country’s nagging unemployment results from cyclical, rather than structural, forces, and that as the recovery continues, the jobs created will reduce the ranks of the jobless and even fill some of the “skillsgap” positions. That recovery—assuming that housing continues its rebound—could also diminish the impact on unemployment from the housing bust, which left many otherwise employable Americans underwater on their mortgage and unable to take a job that meant relocating.

But many economists also maintain that the skills shortage and structural employment holes in the economy are very real, and could keep unemployment higher—and growth lower—than in past recoveries without more training programs, educational reforms and government incentives. “There is a significant disconnect between the current capabilities of workers and jobs being created,” says Edward Gordon, a Chicago, Illinois-based work force planning consultant. “We have a 21st century economy and a 20th century work force.”

While the current 7.8% unemployment rate isn’t out of line with past recessions, some economists argue that the current situation is worse. They note that the jobless rate would actually be at least 47% higher if labor participation rates—the percentage of jobless that are actually looking for work—were not hovering near historic lows, and more than 8.5 million more workers, as the year ended, were not settling for part-time work because full-time jobs were unavailable.

The Chronically Unemployed

What concerns so many experts is the trouble that some workers have had in finding work in recent years, particularly in industries where the skill requirements are increasing. According to the BLS, as much as 45.9% of the unemployed during the Great Recession were out of work longer than six months—more than at any other time since BLS began keeping this statistic in 1948. Nearly 4 million Americans have now been out of work for a year or longer. “I worry most about these workers who stay unemployed for a long time,” says Laurence Ball, an economist at Johns Hopkins University.

That’s because research shows that the longer workers older than 50 remain unemployed, the less likely they are to work again. “Cyclical unemployment, left untreated for a long time, can become structural unemployment as people lose skills, as they lose attachment to the labor force, [and] as their work networks dry up,” Federal Reserve Chairman Ben Bernanke said at a press conference last November.

The worst case? Economists say that could leave the United States with a permanent underclass of chronically unemployed, with huge implications for the economy, government budgets and social stability.

While Europe was mired in a 15-year struggle with long-term unemployment during the 1980s and 1990s, the United States figured its flexible labor laws and dynamic economy would spare it from such a future plight. But, in a paper released last spring, Harvard economist Larry Summers and University of California at Berkeley economist Brad DeLong noted that even as the unemployment rate drops, the share of the adult population that is working—the so-called “employment-population” ratio—has barely budged. That suggests laid-off workers are not returning to the workforce as the economy improves. That also, the authors warn, “raises the possibility that the United States is not so immune after all.”

Admittedly, some labor analysts believe the problems employers claim to have in finding qualified workers is exaggerated and partly reflects their unwillingness to raise pay to levels that would attract talent. These analysts say that companies are compounding the problem by posting job listings on the Internet, and then using filters that are so restrictive that they eliminate virtually every applicant. “I know of one company that had 29,000 people apply for an engineering job—and the filters were so tight that no one was considered qualified,” says Peter Cappelli, a management professor at the University of Pennsylvania’s Wharton School of Business. “These systems screen out people who would otherwise be hired.”

An Increasing Reliance on Part-Timers

Some economists also contend that the stubbornly high unemployment rate isn’t just the result of the widening skills gap or the weak economy. For their part, employers are relying more on part-time, temporary and contract workers that they hire and release as demand changes. In 2010, the share of part-time workers hit a record 19.7%. And, according to a 2011 survey by the McKinsey Global Institute, 58% of the U.S. firms surveyed said they expect to use more part-time, temporary or contract employees over the following five years.

Another challenge is that the education required for many jobs is increasing, particularly in manufacturing. Consider that in the 1950s, 84% of manufacturing workers had graduated from high school. But according to workplace consultant Ira Wolfe, many of them were only reading between the 6th and 8th grade level. Fast-forward to the present and the rapid automation in manufacturing means that many of today’s workers need the math and computer skills to program, operate and repair a robot. Indeed, Wanted Analytics, a Quebec- and New York City-based jobs tracker, reports that the number of online help-wanted ads seeking robotics experience last May was up 29% over May 2011.

The trend toward higher-skilled jobs will only accelerate as corporate America—in its quest to compete with low-wage nations—builds more automation into its factories. In fact, some experts believe that the future of U.S. manufacturing won’t so much involve making things, but designing and building the automated equipment that other countries use to make—and move—things. Indeed, Amazon.com’s recent acquisition of Kiva Systems, which makes self-propelled robots that whiz around warehouses to retrieve and carry packages to their proper shipping point, for $775 million is just one significant indicator of the growing market for industrial robotics.

Gordon estimates that between now and 2020, roughly three-quarters of all new jobs will be high-paying positions requiring advanced skill sets. While there will be a need for 123 million skilled workers, only 50 million Americans will have the necessary qualifications. “The number of Americans who are qualified for these jobs has not increased over the last 30 years,” Gordon says. “What we have witnessed is a structural collapse of the U.S. educational, vocational and training systems.”

Few Quick Fixes

Most experts agree that there are few quick fixes to these challenges. The solution requires improving the nation’s schools, boosting the number of worker training and retraining programs, and creating more government incentive programs that get workers back to work.

Of these, improving education is the area that will take the most work. According to the Organization for Economic Cooperation and Development, the United States now ranks 22nd out of 27 countries in the share of today’s youth expected to complete high school in their lifetime, and 14th in the percentage expected to earn a college degree. One reason is that the percentage of children in the United States living in poverty has risen from 16.2% in 2000 to 22% in 2010, and studies show that children raised in poverty are more likely to drop out of high school and less likely to finish college. As researchers at McKinsey put it in a 2009 report, “The gaps in education by income in the United States impose the economic equivalent of a permanent national recession.”

Experts all agree on the need for schools to strengthen their math, science and technology curriculums. Miller, of Permac Industries, believes that high schools also should offer training courses to give students who aren’t headed to college the skills to get a job after graduation. “American parents have pushed their children into college as a ‘guarantee of economic success’—but the evidence isn’t there anymore,” she says, citing an Associated Press analysis of government data that found that 53.6% of college graduates younger than 25 were unemployed or “under-employed“ in 2011. She notes that Apple requires its most highly trained retail clerks—who are known internally as “geniuses”—to have college degrees. According to The New York Times, Apple clerks earn an average of $12 an hour, which Miller notes is about what those workers would earn at an entry-level manufacturing job. “How many years will it take these ‘geniuses’ to pay off their college debt at $12 an hour?” she asks.

While community colleges have long provided vocational training, some companies are collaborating with these schools in ways that reinvent the old corporate apprenticeships. California Steel has more than 40 apprentices working in its different training programs, including 11 students from nearby Chaffey College who are working as paid intern electricians. In Minnesota, two community colleges have launched Right Skills Now, a new program developed by the Manufacturing Institute that trains students to run computer numerical controlled machines in just 16 weeks. Forward spoke with Miller about Right Skills Now in its March/April 2012 issue.

While graduates earn college credit and an industry certification that can help them in their job search anywhere, they are practically guaranteed a job at one of several nearby companies at a starting wage of about $18 an hour, following an eight-week internship. So far, 40 of the 55 students who enrolled during the spring 2012 semester at the two Minnesota schools have been hired by local employers such as Permac Industries. Miller, of Permac Industries,—who helped the schools start the program—has hired one student “and certainly hope to hire more with the next graduating class in January,” she says. Following the successful pilot in Minnesota, the Manufacturing Institute is now expanding the program to Nevada and Michigan and expanding the curriculum to teach welding, production and other factory skills.

A Role for Government

Some experts also believe there is a role the federal government can play to grease the labor markets. Stephen A. Wandner, a visiting fellow with the Urban Institute, believes Washington, D.C., should champion innovative programs that help get workers back on the job, including job search assistance, self-employment assistance, re-employment bonuses and work-sharing programs. Experts contend that Germany kept unemployment low during the recession by providing supplemental compensation to employees at companies that cut hours across the board to avoid laying off skilled workers.

Labor experts also believe Washington, could motivate laid-off workers to get back on the job quickly by subsidizing their job search. While conservatives criticized the Obama administration’s effort to extend unemployment benefits from 26 to 99 weeks—arguing that encouraged laid-off workers to delay their job search—Wandner believes that providing job search assistance (JSA) can be an effective way to motivate the unemployed.

In one version, the program would create accounts for laid-off workers with, say, $3,000 that they could use to pay for job training, travel to job interviews, or printing resumes. If workers got jobs right away, they were free to keep the money as a bonus. Wandner notes that a pilot test in New Jersey found that offering JSA helped dislocated workers return to work more quickly.

Getting workers back in the job market not only ensured that their skills didn’t have time to erode, but sharply reduced the number of weeks that they collected unemployment insurance. “The benefits far exceed the costs for the government,” he says.

Innovate and Compromise, or Fail

Of course, no amount of job search assistance is going to help workers whom employers deem too old. Some economists think the best hope for these workers—generally older than 50—is to apply their years of experience by starting their own business. Self-Employment Assistance programs, such as one tested in Massachusetts, allow laid-off workers to receive unemployment insurance even as they’re getting their own business off the ground. According to Massachusetts officials, the program reduced the time that participants were unemployed—and increased the amount of time they were re-employed.

Whether it’s providing older workers the funds to hang out their own shingle, or retraining other workers to give them the skills for the jobs of tomorrow, the reality is that companies, workers and governments need to take new approaches to employment. That’s because while the recovery will put some of the unemployed back to work, it won’t be enough by itself to address the growing skills shortages.

At California Steel, a large number of its 200 or so craftsmen are expected to retire in coming years and Guge, executive vice president of finance, worries whether he can find and train enough skilled technicians to replace them. “We’re going to need a lot more of these workers in the future,” he says. If Guge can’t find enough workers with the skills he needs, the consequences could extend far beyond this company.

After all, it is not at all clear that the country on any level has the necessary commitment in human or financial resources to solve these problems. There are bright spots, of course: innovative and effective training programs, cooperative efforts between industry and schools. But budget-battered states and cities are reducing their support for public education, cutting classes, increasing class sizes, laying off teachers. It is doubtful that industry, without government help, can fill that financial gap, creating enough collaborative vocational programs to make a significant dent in a nagging national problem. At the national level, Congress and the White House have been hopeless in developing the kind of programs that would be of sufficient magnitude. That would require a kind of cooperation and compromise that has for too long been absent from Washington.

If America finds itself with an underclass of unemployable workers, that could raise the societal costs for everything from welfare payments and indigent health care to law enforcements and prisons. This would be a significant and all but permanent drag on the economy. For many Americans, it would represent a recession that never ends.


Dean Foust was a writer, editor and bureau chief for BusinessWeek for 23 years. He now produces thought leadership content for corporate clients, including a number of Fortune 500 companies.