Labor : A Shortage of Skilled Workers

Last week’s stock-market gyrations grabbed the headlines, but America’s most important long-term economic problem does not involve bears and bulls, but people. Like the persistent energy crisis that burdened the U.S. economy in the 1970s, deepening labor and skills shortages are creating bottlenecks that could short-circuit not only current prosperity but also future business expansion.

These labor deficits, as Federal Reserve Chair Alan Greenspan has pointed out, could ignite “unsustainable” inflationary wage pressures and eat into corporate profits. The aerospace manufacturer Boeing has already experienced a taste of the problem. It recently announced an unexpectedly large $1.6-billion charge against future earnings because of production delays associated with the training of new, relatively unskilled employees. The company’s parts suppliers have been similarly affected by labor-skill problems.

Another bottleneck has emerged in the nation’s transportation system. Partly due to the decline of such blue-collar professions as dockworker and truck driver, as well as poorly executed corporate mergers, deliveries of goods are taking far longer than normal. Some cargo containers arriving in Southern California take five times the usual three to four days to reach local customers. The result: unmet schedules, reduced profits and decreasing overall competitiveness.

The nation’s looming labor shortage is the result of three factors: demographic trends, falling skill levels and declining worker values.

Perhaps the least understood aspect of the labor shortage relates to demographic trends. Despite big increases in immigration during the past two decades, America’s work-force growth now stands at its lowest level this century, having fallen from more than 2.5% annually, in the early 1980s, to roughly half that today. By early next century, labor-force expansion could dip below 1% annually.

On the positive side, this diminishing supply of labor, along with a modest but steady increase in jobs, has worked wonders on the U.S. unemployment rate. Yet, at the same time, some observers fear that the growing labor shortfall will force more and more companies to look abroad to meet their employment needs.

Seen in this light, recent attempts to curtail immigration may be the wrong medicine for a country increasingly in need of the minds and brawn of newcomers. “We’re getting into a situation that’s permanent, [but] which we could change in a week by changing the immigration laws,” says David Birch, president of Cognetics, a Massachussetts-based consultants. “No one seems to realize we’re running out of [the] raw material [of labor].”

Nowhere are shortages of this raw material more critical than in those niches of economy dependent on highly skilled workers. According to the Information Technology Assn. of America, there are now 190,000 unfilled high-tech jobs. This situation will get worse: A net million such jobs are expected to be created over the coming decade, but there will be virtually no increase in supply.

Faced with such shortfalls, some companies are already going abroad to find their brainiest labor. John Kennedy, for example, has one of the most famous of American names, but his company, Marketing Information Systems of Evanston, Ill., has been hiring its programmers in St. Petersburg, Russia. He has so many U.S. competitors for the same labor pool that salaries in St. Petersburg have risen 40% this year, to roughly $1,500 a month.

The talent gap is also fueling a permanent shift of both high-tech and ancillary industries from the supposedly dominant United States to countries like India, Israel, Ireland, the Philippines and even Mexico. In the early 1990s, U.S. multinationals doubled their investments abroad, creating not only lower-wage assembly jobs but also a plethora of new high-end positions. In the early 1980s, for example, one in 40 among Intel’s 2,000 Malaysian employees was an engineer. A decade later, the proportion was one in six.

The roots of America’s skills crisis also stem from changes in the national culture. As the late Herman Kahn observed, U.S. popular culture in the 1960s eschewed traditions of hard work, essential for technical competency, for more “rewarding” professions such as law, journalism and medicine. Even as high-tech has boomed, the number of Americans trained in engineering and computer science has dropped dramatically, from a high of 50,000 in 1986 to 36,000 in 1994.

In essence, the United States is building a high-tech economy that Americans are increasingly unable to operate. To date, this weakness has been obscured by the immigration of educated professionals from East Asia, the Middle East and the Indian subcontinent. Today, one-third of the engineers in Silicon Valley and Orange County are from abroad. Nearly one-fifth of all undergraduates in computer science, and half of all doctoral candidates, are citizens of foreign countries.

But the nation’s ability to live off the work ethic and knowledge of others is ebbing fast. The end of the Cold War has diminished the flow of skilled refugees; anti-immigrant hysteria, combined with the “family reunification” obsession of the pro-immigrant lobbies, has worked to reduce the number of highly skilled newcomers. The Immigration and Naturalization Service, meanwhile, has cracked down on companies providing visas to skilled workers. Between 1992 and 1995, the inflow of skilled immigrants nationally dropped by 32%, and nearly 75% in Silicon Valley. The number of computer scientists and mathematicians entering the country in 1996 was almost 21% below the 1993 rate.

The computer industry is not the only sector facing a skills shortage. Scores of other industries are constrained by the unavailability of trained--and trainable--workers. The recent shakeout in digital-effects firms in Southern California, for example, can be partly traced to skilled-labor shortfalls, which have driven the salaries of even novice digital animators to upward of $80,000 annually.

Many of these problems result from a malfunctioning secondary-education system, particularly in urban areas, where one in three young Americans go to school. But many employers complain more about what they see as a decline in their employees’ basic work ethic, particularly among younger workers, and a fall-off of interest in pursuing blue-collar professions. Currently, there is a 300,000 to 400,000 shortfall of truck drivers nationwide.

Ironically, many of these complaints have their roots in the overall success of the U.S. economy. With the unemployment rate below 5%, employers are having to turn to marginal workers to fill jobs. Many of these workers, particularly in urban areas, are inadequately educated or unmotivated or both. Even in areas of high unemployment, such as New York City, employers find that the majority of new entries to the work force--in some cases, 95 out of 100 applicants--do not meet minimum standards for hiring.

It’s difficult to see how welfare reform, which aims to introduce millions of such marginal workers into the work force, can do anything but further dilute labor quality, at least in the short term. Turning welfare recipients into productive workers will be an arduous, tedious and time-consuming affair.

At the cargo-clogged ports of Los Angeles and Long Beach, where import shipments are up 20% over last year, labor shortages are contributing to the logjam. High-paying port jobs remain attractive to a large pool of applicants, but attempts to hire new workers are impeded by the fact that one-third of the applicants, including many high-school graduates, fail tests requiring 7th-grade math and English skills, according to shippers and port officials.

Meanwhile, the local aerospace industry, after losing roughly 150,000 aerospace jobs during the late ‘80s and early ‘90s, is suffering from a scarcity of tool-and-die makers and other skilled manufacturing workers. At Newman Machine in Burbank, the business rebound has allowed David Goodreau, company president, to increase his staff from eight to 17. He says could hire 50 more, at salaries starting near $10 an hour and more than twice that for experienced workers, if workers could be found.

The supply of journeyman machinists, Goodreau says, has become so tight that skilled machinists can now command “signing bonuses” that can reach into the thousands of dollars.

Phil Jakobi, who runs Delco Machine and Gear, an aerospace machining shop in North Long Beach, also blames popular culture for making industrial occupations unfashionable. He, too, has difficulty in recruiting workers who sometimes seem to prefer minimum-wage jobs over machine-shop jobs. “The working career path is not glamorized in this society,” Jakobi complains. “If they had a show on TV called ‘Long Beach Machinist,’ it would work wonders.”

Of course, these kinds of work-force problems might be “solved” if the current uncertainty in the stock market slows economic growth to a crawl, forcing people to again scramble for jobs. But today’s labor bottlenecks are teaching many U.S. companies the painful long-term lesson that the workers they need to grow can no longer be found at home.