In the High-Skilled Economy, Low-Skilled Workers Fall Behind

As the nation struggles to regain jobs, an unqualified labor force hinders recovery. Can we train Americans fast enough?

As the nation struggles to regain jobs, an unqualified labor force hinders recovery. Can we train Americans fast enough?

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Eric Spiegel dwells in an alternate universe. The hulking 53-year-old Ohioan, a former Harvard University offensive tackle, follows the headlines from Washington about America's "jobless recovery" and the agonizingly high unemployment rate of 9.2 percent. But that's almost the mirror opposite of the problem that faces Spiegel, president of Siemens Corp., the U.S. subsidiary of the German engineering conglomerate. He has jobs galore to offer, more than 3,000 of them nationwide, but he can't find people with the skills to do them. He's not just looking for engineering Ph.D.'s, either. He needs hundreds of technicians, welders, and machinists. He has even hired a crew of headhunters to scour the nation for prospects. "We didn't have to do that a couple of years ago," he says. "But our human-resource managers are under a lot of pressure from the businesses to fill these positions."

So, in September, Siemens is launching a new strategy that draws on a very old practice from its parent company in Germany: apprenticeships. In Charlotte, N.C., where Siemens is building the nation's largest gas-turbine plant and hopes to hire some 800 people next year, the company is opening a pilot program that will pluck non-college-track seniors from nearby Olympic High School; Siemens will pay them an hourly wage to work part-time and will also pay their way through a two-year college program at nearby Central Piedmont Community College.

Why? Because existing technical and vocational schools were not teaching the precision machining skills needed to make the steam turbines and electrical generators, says Mark Pringle, director of the company's operations in Charlotte. Mike Panigel, Siemens's chief of human resources, adds, "The bulk of the people, we'll end up employing; and to those who have not proved to have the necessary skills, we can at least say, 'You've been trained.'"

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The challenge that Siemens faces highlights the nation's large and growing "skills mismatch," a widening gulf between the businesses that are hiring and the skills of millions of Americans who are looking for work. A big debate is raging about how much of today's unemployment results from the skills mismatch. It's clear that the Great Recession contributed most to the high jobless rate, despite the "recovery" that officially began two years ago. The weak recovery is nothing less than a total inversion of the debt-inflated consumer bubble of the 2000s. Consumers, with their wealth reduced and their incomes often stagnant or falling, are reluctant to buy, and stores are unable to sell. Not surprisingly, employers are reluctant to hire.

But beneath that overarching problem, one startling figure jumps out. Educated workers with the right skills are, for the most part, doing all right--far better, at least, than those with little education. "Since the start of the recovery, the economy has created something like 1.5 million to 2 million net new jobs, and of these the vast majority have been 'high-skilled,'" says Susan Lund, head of research for the McKinsey Global Institute. The most recent population survey by the Labor Department's Bureau of Labor Statistics offered this striking contrast: Since the recovery began producing jobs in January 2010, the United States has suffered a net loss of 500,000 jobs among people with high school diplomas or less, but a net gain of 1.2 million jobs for college grads. "During the entire recession, the unemployment rate for college graduates never exceeded 5 percent, while the unemployment rate for people without a high school degree soared to 15 percent," Lund says. Of the 9.2 percent of Americans who are currently unemployed, 78 percent did not finish high school.

According to a study of major economies by the ManpowerGroup, a Milwaukee-based workforce consultant, 52 percent of employers in the United States complain that they can't find the right talent--even at a time of sky-high unemployment. That's a much higher share than the global average of 34 percent.

More alarmingly, the statistics suggest that the skills mismatch is becoming part of a deep structural problem in the economy. Despairing of finding work, many of the least employable people are simply dropping out of the workforce and swelling the pool of the "permanent" unemployed. As of this June, 43 percent of the nation's 14 million unemployed workers were in the ranks of long-term unemployed (defined as more than 27 weeks). That's the highest level since the government began compiling that data in 1948, far exceeding the previous record of 31.5 percent in 2009, when the economy was near the trough of the recession; the number is likely to be even higher by the end of this year. Even during the great "stagflation" of the 1970s, the proportion of long-term unemployed was only about 18 percent.

The problem, economists warn, is that unemployment begets unemployment as skills atrophy. In a recent analysis, the Federal Reserve Board estimated that a person who has been unemployed less than four weeks has a one-in-three chance of landing a new job within a month. For a person who has been unemployed for 27 weeks or longer, the odds drop to one in 10.

Image credit: courtesy of Siemens

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Unemployment isn't the only result of the skills mismatch. Another is the rising income inequality between people in skilled and less-skilled jobs. That's already a long-running trend, with real incomes stagnating for much of population and climbing sharply for those at the very top. Worse yet, McKinsey predicts that the skills gap will widen. By 2020, the institute estimates, the United States will have 1.5 million too few college grads to meet employment demands, while nearly 6 million Americans who didn't finish high school will probably still lack work.


Washington has been almost useless on this issue. The federal government's main job-training law, the Workforce Investment Act, is a bureaucratic mess.

The Obama administration has ramped up spending on education, and it pumped money into job training through the 2009 stimulus package. But most of the added training money has dried up. Total federal spending for job training adds up to a paltry $15 billion annually--about what it was in 2002, adjusting for inflation, according to Georgetown University professor Harry Holzer. "That's one-tenth of 1 percent of the [gross domestic product]," he says. "That's way less than virtually any country spends on this stuff."

Employers, along with Holzer and other analysts, complain that federal job-training programs either don't respond to their needs or do so only by accident. Washington is spending about $20 billion annually on Pell Grants for post-secondary education, but Holzer says that the money isn't targeted enough to make a real difference. "Those people go off to community college. They get no guidance," he said. "They get stuck in remedial classes that they can't get out of, and eventually they kind of drop away." On Capitol Hill, a few legislators are pushing for a whole new approach to job training. "Everywhere I go, businesses say, 'We have some job openings; the problem is, we don't have a skilled workforce,'" Sen. Patty Murray (D-Wash.) told National Journal. "You go and talk to people. They'll do anything. They want a job, but they don't have the skills to be able to get those jobs. And it's because communities haven't defined how they're going to get those jobs that are needed."

But progress is slow, and political interest is low. Lawmakers in both parties are fixated on cutting spending.


Economists agree that it's nearly impossible to precisely quantify the skills problem. It may amount to no more than 2 percentage points of the 9.2 percent unemployment rate, says David Altig, director of research at the Federal Reserve Bank of Atlanta. "The unemployment rates for people with bachelor's degrees or higher is still over double what it was right before the recession,'' he notes. "It was down under 2 percent. It's still up around 4.5 percent." Proportionally, he says, that's not much different from the rate for those with a high school education, which was about 5 percent before the recession and is about 10 percent now. In absolute numbers of people, though, the gap is widening between those with a college education and those with a high school education or less.

Businesses' failure to hire more has economists puzzled. Analysts usually cite lack of consumer demand and uncertainty about the future. Some also theorize that the housing collapse made people less mobile and created a "geographic mismatch," because many homeowners are underwater and can't sell their homes for enough to pay off their mortgages. Another issue, some experts say, is that employers hold all the bargaining power and have been able to keep compensation low across the board. As a result, workers have fewer "wage signals," as economists call them, to nudge them from declining industries to rising ones.

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But other important changes at the microeconomic level--in the workplace--are aggravating the effects of an anemic economy. For one thing, businesses are leery about hiring anyone but the "perfect candidate," says Jeffrey Joerres, CEO of the ManpowerGroup. "All that does is exacerbate what's happening. Companies are down to really analyzing all the elements of their workforce. Every position is carefully evaluated for productivity, even the janitors."

Beyond being pickier, companies are demanding higher skills--even for jobs that once required no more than a high school diploma. "Take truck drivers," says the Atlanta Fed's Altig. "It used to be if a guy drove a truck, that was the end of it. Someone else would take over the other tasks. But one of the things the recession did was cause many companies to reorganize their processes. So that required people who can do multiple tasks. Truck drivers have to do paperwork. Or sales people in auto retailers--there used to be a back office to cut the finance deal. Now you've got to be able to do both. So for exactly the same jobs, you need a higher level of competency."

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The average sales rep today has to be much more than a Willy Loman type, "riding on a smile and a shoeshine"; he or she must also be a master of finance and product development. "Sales people are among the hardest to find," Joerres says. "At the same time [that] their product is becoming more sophisticated to sell, you also now have to be more of a financial expert, because margins are reduced. You have to do deals yourself, do more of a consultative sell instead of just a relationship sell. Product cycles are shortened too, which means you have to refamiliarize yourself with the product catalog regularly. All of this has added to the complexity of the job."

Nicholas Pinchuk, the CEO of Wisconsin-based Snap-on, which supplies automobile tools to 3,500 franchisees nationwide, says that as the number of computer codes in an average car has jumped from 200 in 1995 to 5,000 today, auto mechanics require the equivalent of an associate's degree from a good vo-tech school. "Changing the headlight on a car used to be like changing a lightbulb. Now you have to apply a diagnostic tool, a kind of laptop for the car, that coordinates the lights with the control systems of the car, which for some cars means that high beams go on and off automatically or that the headlights move left and right as you go around a turn," Pinchuk says. "Or take balancing tires. We used to be cavalier about it. But today, cars are lighter because of higher fuel economy. So tire balance is more important. You have to master the shape of the tires. Almost every tire has a high spot, and the rim has a low spot. To sense those, you need equipment skills and a general understanding of materials--for example, the different coefficients of expansion of aluminum and steel."

With all that specificity cropping up in job descriptions, fewer young people heading into school know "what they need to study," says Laszlo Bock, director of "people operations" at Google. "There is an information asymmetry." So here, too, the market doesn't seem to be adapting. And critics say that the Obama administration hasn't put the right kind of programs in place to fix either the short-term mismatch or the longer-term college-education deficit. "We don't even have a national jobs database," Lund says.


Americans used to take great pride in the flexibility and dynamism of their economy, casting a cool eye on more-stagnant economies such as Germany's, with its antiquated industrial-apprenticeship structure. But Germany's unemployment rate of just over 6 percent is now well below the rate here, in part because of long-established government programs that underwrite corporate job training. It was no accident that when Siemens designed its Charlotte apprenticeship program, "we had a German employee come over and advise us," Pringle says. "Siemens has a very extensive program in Germany." (Notably, North Carolina is helping to underwrite Siemens's Charlotte program, but the effortÍ has no federal funding.)

Meanwhile, many CEOs complain that the U.S. economy has become sclerotic with regulation. According to a recent World Bank study, the United States now ranks 27th in the world in the time it takes to approve construction permits, putting it right after Thailand. Lenny Mendonca, a McKinsey director, even suggests creating "enterprise zones" in certain U.S. states, emulating systems in Singapore and some African countries, to cut down on the plethora of often contradictory federal, state, and local regulations. All in all, he says, Americans need to have "less hubris, less of a sense that we know everything and are the benchmark for everything."

Part of the American malady is the "rise of the rest." Many more countries have become fiercely competitive in capitalism--a kind of ideological blowback from our preaching to the world for decades about capitalism's virtues. The world listened, and now the U.S. can't compete as easily as it did when much of the planet lived under stagnant communist regimes and creaky autocracies. And in the end, American business may be hurting itself inadvertently: Despite the tendency of employers to search out the highest-skilled workers, American hiring practices may be holding back innovation.

Because companies are pinching pennies, pushing workers to juggle more tasks and become more productive, fear rather than boldness dominates many workplaces. "Today, at many companies, it's too much of a risk to walk into your boss's office with an out-of-the-box idea," says Cindy Szegedy, a former director of the Corporate Executive Board. "There is a palpable fear of upsetting the status quo." Joerres says that businesses are operating so tightly that "employees don't have much time to think during the day." With less innovation, fewer new companies are started up or spun off, and fewer jobs are created.

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Pinchuk, of Snap-on, says that the federal government is beginning to grasp the skills problem, noting that President Obama recently announced a new public-private partnership in vocational programs. But with the federal budget under assault, Perkins Grants for technical schools are being cut. "The technology may be moving faster than the schools can keep up with it," Pinchuk says. "What I don't see from the federal government is an identification of technical education with reviving the middle class."

As policymakers grapple with this problem, one question is whether the federal government is equipped to identify the kind of skills that businesses will need just over the horizon. On Capitol Hill, Murray and other lawmakers are aiming at an enterprise-zone concept under the Workforce Investment Act reauthorization. They want workforce boards to coalesce around local needs so that schools, employment offices, and employers are all telling job candidates about available jobs and how to get them. "We're a very diverse country, and what works for my region--Boeing jobs, aerospace jobs, marine industry--may not be what works for Reno, Nevada, which has the hospitality industry," Murray said.


Obama, heading into an election year, doesn't have many tools left to spur a surge in the economy before the November 2012 election. With Washington's agenda dominated by the budget-cutting zealots of the tea party, another big economic stimulus is out of the question. All the president can possibly do is whittle away at the edges of that 9.2 percent, and some critics question whether his administration is even doing a good job of that. Andrew Levin, who ran a highly praised job program at Michigan's Energy, Labor, and Economic Growth Department, calls federal job-training programs "a patchwork of overlapping and even conflicting statutes" that variously aim money at dislocated workers, adult education, youth training, and rehabilitation. Some programs date back to the 1930s. "It doesn't make for a coherent system," he says.

Education Secretary Arne Duncan, in an interview with National Journal, boasted about the administration's new $1 billion vo-tech program. But even he admitted that "we've definitely backed off" from vocational training and that there has been no "systematic" effort to relaunch such programs. Beyond that, "too many schools today are still preparing students for jobs from 40 to 50 years ago," he says. It's not entirely the federal government's fault: Many Americans resist a renewed focus on technical and vocational schools.

College "pulled some of the most talented people away from technical schools." -Jeffrey Joerres, Manpower Inc.

Joerres, the chief executive at Manpower, said that much of the problem stems from Americans' outsized love for traditional college education. "It started in the 1970s, when we sent everyone to college," he says. "It pulled some of the most talented people away from technical schools. The 25 percent of the population that would have gone to technical school and made one helluva an electrician moved to the low end of the universities." Others agree. "We have these siloed ways of approaching career guidance and counseling," said Andy Van Kleunen, executive director of the National Skills Coalition, an advocacy group that pushes for more training. High school guidance counselors tell every kid to go to college. Colleges tend to steer students toward other collegiate-oriented programs. Government job-training programs have, at best, a faint voice in this process.

Economists say that the best way to train adults for today's job market is to offer basic education along with hands-on skills training, which is what Siemens is trying to do. Manufacturers are frustrated that schools are giving short shrift to viable technical career paths. Gardner Carrick, director of strategic initiatives for the Manufacturing Institute, the job-training wing of the National Association of Manufacturers, cited large numbers of both interested young people and career opportunities. "The tech careers, people who are able to build stuff, we think the interest is out there," Carrick said. "They lack the ability to be able to pursue them."

Critics say that Duncan is behind the curve and continues to speak in maddening generalities about a problem that, increasingly, requires specific solutions. "The people around Duncan are left over from previous administrations. All they can talk about is standardized testing and charter schools," says Margaret McKenna, a former Education Department official who is now president of the Wal-Mart Foundation.

Some federal money is going into new ideas. At Gateway Technical College in Wisconsin, grants under the Workforce Investment Act help to run "boot camps" for employers looking for skilled workers. Students come away with national credentials for a variety of industrial fields. But such efforts are fairly meager. Despite a push to insert a new business viewpoint into federal job training, Labor Department officials have tended to treat such programs more like unemployment and welfare programs. When it came to matching workers with jobs, the programs did little more than act as intermediaries in the labor-market exchange.

"It continued to be a very large bureaucracy that spent a lot of money essentially on paying staff and not paying for job training," Carrick said. Holzer complains, "Community colleges are divorced from the workforce. Students often can't get into the technical courses offered by community colleges, because they're oversubscribed."

Sophisticated technical training is expensive. "It costs more per head to train somebody in a machining lab with new equipment that has to be changed every few years, versus somebody in an English literature course," Van Kleunen said. But given Washington's drive to slash spending, don't expect more money from Congress any time soon. Indeed, House and Senate Republicans are even balking at funding Trade Adjustment Assistance, a long-standing program that helps factory workers who lose their jobs as a result of trade agreements.

Siemens and other employers aren't waiting. "We're just not finding the people we need out in the market," Spiegel says. "We need to create them."