Recession Aside, Are We Headed for a Labor Shortage?

This article was originally published by the Fiscal Times on Thursday, Aug. 26, 2010.

Despite one of the worst recessions of modern times, the U.S. economy could face significant labor shortages in the coming months because of a mismatch between the quality of the available labor and the demands of industry.

By Katherine Reynolds Lewis

Alan Yellowitz of Fairfax, Va., has been job hunting since January 2009, when he was laid off from his information technology sales job along with the rest of his department. Competing with hundreds of applicants for every opening, he has clawed his way to the final round of interviews several times — only to fall short of winning the position. "There are so many more people looking for the same jobs," Yellowitz, 47, said in an interview. "It's crazy how companies are picking and choosing. You feel beat up after a while."

Yellowitz — like many of the other 14.6 million unemployed Americans like him — wasn’t supposed to be in this bind, as the oldest Baby Boomers started to retire and the labor supply began to tighten. Nearly 20 years ago, the first in a series of economic reports predicted a dramatic labor shortage as an estimated 76 million Baby Boomers departed the workforce and the smaller cohort of Generation X workers — or Baby Bust — took their place. As recently as this spring, researchers predicted there could be five million more jobs than workers available to fill them by 2018, resulting in $3 trillion of lost U.S. economic output.

"We have this huge bump coming through of older people followed by a dearth of younger people," said lead researcher Barry Bluestone, an economist and dean of the School of Public Policy and Urban Affairs at Northeastern University. "We're going to have a huge labor market shortage."

Huge labor shortage? That’s hard to imagine amid the worst recession in modern times, with unemployment locked at 9.5 percent and many discouraged Americans simply dropping out of the market. One skeptic, Wharton business school professor Peter Cappelli, said. "They've been predicting a labor shortage since the mid-1990's and guess what, it's not happening.”

Yet some evidence suggests there may already be spot shortages of labor, as employers complain about the difficulty of filling open positions and the lack of skilled workers.


Labor shortages amid widespread unemployment can be a difficult concept to grasp, especially if you’re one of those desperately looking for work. But experts note that the labor market is dynamic, with dozens of moving pieces that affect economic growth and the labor supply, not a simple model measuring the number of available jobs against the available workforce. Focusing solely on the number of jobs and the number of workers ignores important complexities, including such variables as changing levels of immigration, the retirement age and productivity. Simply put, demographics isn't destiny. The number of potential workers in each age bracket is only one factor in determining the supply of available labor.

The Bureau of Labor Statistics predicts that in 2018, the total labor force will reach 166.9 million and total employment will climb to 166.2 million jobs — an apparent shortage of 700,000 jobs. But BLS economist Ian Wyatt points out that while population projections tend to be very accurate, assumptions about the level of immigration and productivity growth (key factors in determining the size of the workforce and employment opportunities) are far less reliable. The future demand for workers "is a very tough question to answer," Wyatt said.

Add to that the rapid change in technology and the massive shift from manufacturing to the service industry, which have exacerbated the growing mismatch between jobs available and the workers who can fill them. Typically, as the number of job openings increases, the unemployment rate falls. But in the past year, the job openings rate has climbed by about 20 percent, while the unemployment rate remains high, said Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, in a speech earlier this month.

"Firms have jobs, but can't find appropriate workers. The workers want to work, but can't find appropriate jobs," Kocherlakota said. "There are many possible sources of mismatch — geography, skills, demography — and they are probably all at work."

Recessions tend to be followed by spot shortages of labor, as employers adjust to paying more and recruiting more aggressively to find the right match for an open position. The first jobs to emerge from the recession usually can’t be filled by unemployed workers without training in the latest technology, said Richard W. Judy, chairman of the consulting firm Workforce Associates. "We have a mismatch between the jobs that are available and the workforce that is seeking work."

Labor advocates say that companies wouldn't have trouble filling these positions if they offered better pay packages or spent more time training employees — rather than expecting new hires to start with all the skills needed to do the job. "It's like saying, 'I want a really good tasting chocolate milkshake with no calories but I can't find it,' " Wharton’s Cappelli said. "I want someone who can come into my organization and immediately understand my customers and my equipment and I can't find it. They're expecting people to leave school with the kinds of skills that in the past you only acquired after several years of working."

Ultimately, workers aren't interchangeable widgets that can be moved around the map of America and slotted into the jobs that are open. Their unique skills, training and experience determine which jobs best suit them, and their personal situations limit where they can go for work. Many are less mobile than before because they can’t sell their homes or can’t get the price they want.

A case in point is the latest generation of young workers, the Millenials, born in the 1980s and 1990s. There are 80 million of these young Americans, even more than the Baby Boomers, so they're enough in numbers to replace their elders in the workplace. But research and books with titles such as "The Five-Year Party" and "Higher Education? How Colleges Are Wasting Our Money and Failing Our Kids" suggests that many of the Millenials aren’t well-prepared to leap into the workforce.

The average student in a four-year college studies for only 14 hours a week, compared with 24 hours a week in 1961, according to a new report from the American Enterprise Institute. While community colleges often have employer-backed training programs feeding directly into jobs, and the top liberal arts universities deliver students ready for a range of jobs, the majority of colleges in the middle focus too much on attracting tuition dollars and not enough on education, according to Craig Brandon, Keane, N.H.-based author of The Five-Year Party. Brandon said that when he was a college professor, he received calls from former students asking for reference letters for a job as a clerk or waitress.

"They would tell me they had $30,000 in student loans they were paying off with tips from a restaurant," Brandon said. "Four-year liberal arts colleges do a terrible job. They're preparing students for jobs that don't exist anymore."

It's not enough to create jobs, Brandon and other experts say. Policy makers and educators also need to generate an educated workforce with the verbal, quantitative and analytical skills — and ready-to-work attitude — to perform the jobs that will need to be filled in the decades to come.