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The imperfect job market

The persistence of shortages in a range of industries indicates the market is far from efficient.

Markets are great ways of organizing human activity because they are really efficient. They’re flexible, filled with rational actors who move quickly to meet demand with supply. That goes for markets in goods such as oil, and in markets for services such as labor. If there is a shortage of labor, the theory goes, companies increase pay and benefits to make them more attractive and lure more applicants. If there’s a surplus of labor, employees will lower their asking wages. And technology enables this process to happen quickly. Need a driver? Summon one via Uber instantly.

But that’s not quite how the labor market works in reality. The labor market isn’t like the stock market, where buyers and sellers meet and conduct deals instantaneously with the stroke of a key. In fact, the labor market is in many ways remarkably inefficient. And people and institutions often can’t move fast enough — or may lack or lose the potential to move — to fill open positions.

Here’s one of my favorite conundrums of the modern age. The Bureau of Labor Statistics’ JOLTS report tallies the number of unfilled open jobs in the U.S. each month. And that number has been steadily rising over the last several years, even as technology has been making all business processes more efficient. At the end of November 2016, there were 5.5 million job openings in the U.S. That number has more than doubled since 2.2 million in July 2009.

In the years since July 2009, we’ve had 92 months of economic growth, and a record 75 straight months of job creation — a record. The unemployment rate is 4.8 percent. So you’d expect that companies would find some challenges in filling open spots. But the gaps are truly large: 5.5 million is roughly the population of Minnesota. And when you drill down to individual fields, it is clear there are huge gaps: 324,000 openings in manufacturing, and 1.03 million openings in healthcare and social services combined.

There are a few reasons for this.

First, some sectors are highly volatile. They suck people into the industry when they boom and then spit them out when they bust. Which leaves them shorthanded when growth revives. Take construction. Twelve years ago, at the height of the U.S. housing boom, companies hired hundreds of thousands of construction workers, roofers, and painters. But the number of new housing units completed in the U.S. crashed from nearly 2 million in 2006 to 584,000 in 2011 (pdf). That decline of nearly 75 percent forced hundreds of thousands of people to go find new jobs, move, or switch careers. Now that home construction has rebounded — to about 1.06 million units in 2016 — companies are finding that the market isn’t supplying enough workers. There are 184,000 openings in construction precisely because so many left the field during the housing bust and are now gainfully and happily employed in other trades.

In addition, the skills needed in a particular sector can evolve quickly over time. We know that in the past two decades, millions of manufacturing jobs have been displaced by automation and trade. So, in theory, manufacturing companies that want to hire people shouldn’t have much trouble finding willing and able workers. And yet there are 324,000 manufacturing jobs open in the U.S. Why? Many of the people who were historically in the manufacturing labor market lack skills necessary to thrive in today’s factories. To work on an assembly line, you need to be fluent with computers and machines in a way that you didn’t have to be 20 years ago. The Wall Street Journal reported last week that small manufacturers are reacting by investing in training and apprenticeships.

To work on an assembly line, you need to be fluent with computers and machines in a way that you didn’t 20 years ago.

Demand for labor tends to rise (and fall) in relatively short periods of time. But it takes much more time, and more planning, for companies to develop apprenticeships, for community colleges to establish new programs, and for people to acquire the skills that are most desired. Pursuing a career in a specialized occupation, like being a pilot or a nurse, requires people to make a series of long-term calculations, investments, and commitments: complete the educational prerequisites, apply to a program and get accepted, figure out how to finance it, complete the multiyear program. There are a lot of hurdles to overcome in this marathon. And even if it signals that there is the reward of a job at the end of the process, the market alone can’t always pull a sufficient number of people through the process. It’s not surprising that we have shortages of both pilots and nurses.

One way to deal with short-term gaps in the labor market is to import people with the requisite skills who may now be living in other countries. That’s why so many developed countries have fashioned programs that allow temporary visas or other working arrangements that enable companies to recruit people for hard-to-fill slots such as software engineers, farm workers, and doctors.

But these sectors of the labor market are prone to disruption. Policies and attitudes toward such programs can change quickly — in some instances, overnight. Indeed, even hinting that the policies might change can alter behavior. And when that happens, more shortages can develop. In the wake of last summer’s Brexit vote, the U.K. is reconsidering its policies toward workers from other countries. Last week, the owner of a company that runs chicken hatcheries in England said he had shut down a farm and might close two more because many of the people from other countries who worked there didn’t return after the holiday break and the local labor market isn’t supplying replacements.

The beauty of markets, broadly speaking, is that the invisible hand of competition tends to produce a lot of what people want relatively quickly. But today, whether you want to hire farm hands or people who use their hands to program computers, you might have to take a more visible role. It’s not enough to sit back and wait for employees to show up with the right skills. More companies have to take an active role in identifying prospective employees, building training programs, and funding worker education.

Daniel Gross

Daniel Gross is editor-in-chief of strategy+business.

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