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Why Underemployment Is a Bigger Challenge than Unemployment

Hiring employees with greater qualifications than you need may seem like a bargain, but it carries real risks.

(originally published by Booz & Company)

Karl Marx predicted that mass unemployment would become the salient characteristic of labor markets in advanced economies as machines were increasingly substituted for human workers. It is not clear that pattern is as inevitable as Marx forecast. But underemployment (working at less than one’s full productive capacities) seems to be the hallmark of the modern workforce. Over the last 50 years, there has been an inexorable trend of college graduates taking jobs that were previously filled by workers with lower educational credentials. Today, some 48 percent of college-educated men and women have jobs—such as bank tellers, waiters, taxi drivers, and coffee baristas—that don’t require the skills or knowledge acquired when earning an undergraduate degree.

I started studying the problem of underemployment in the mid-1970s and predicted then that it was soon going to get a lot worse. It did, but my forecast turned out to be about 30 years premature. In the past few years, this kind of job dislocation has accelerated—as more qualified workers have bumped the slightly less qualified from their jobs (and those at the bottom have fallen off the last rung). As the effect trickles down the occupational scale, productivity often drops because highly qualified workers are more likely to be dissatisfied with the jobs they are forced to take, and thus tend be more bored, resentful, and distracted than their less-educated counterparts.

The trend toward increasing underemployment has many causes—some negative and some positive—including automation, the export of routine manufacturing jobs, an increase in the number of college graduates, and the growing opportunities for women in professions and positions once reserved for men. At the same time, the expectations of college-educated workers have also increased. Today, young graduates expect good jobs as their just reward for years of (increasingly expensive) higher education. Not only do these grads want high-paying jobs, they prefer work that is interesting and offers a chance for personal and career growth. Increasingly, many are not finding it. This is not a new trend: As one articulate woman explained to Studs Terkel in Working, “Most of us have jobs that are too small for our spirits.”

The chronic underutilization of education, skills, and human capital engenders workplace frustration and low morale.  That’s why thoughtful employers must create conditions under which their employees are fully engaged in their work and, in turn, the company can capture greater value from those employees. Many companies, such as Walmart and McDonald’s, hire people’s hands but not their heads. Others, like Whole Foods and Costco, recruit better-educated, and more highly paid, workers to fill jobs that require higher-order problem-solving skills and the ability to self manage. These employees typically demonstrate initiative, effort, and loyalty—which bring their company higher levels of productivity and profitability.

The underutilization of education, skills, and human capital engenders
frustration and low morale.

This effort pays off: One frequently cited study found that Costco paid its employees about 40 percent more on average than did its closest competitor (Walmart’s Sam’s Club). Moreover, Costco trained and empowered those workers to make managerial decisions, while Sam’s expected its workers merely to follow directions. Because Costco’s motivated employees were more productive, and contributed ideas to increase product turnover and efficiency, the company’s total labor costs were less than 10 percent of sales, while those costs were 17 percent at Sam’s. (Significantly, those figures included the cost of health insurance, which Costco, unlike Sam’s, offered to all its full-time workers). Moreover, the cost of turnover at Sam’s was three times greater than at Costco. Indeed, no matter how you measure it, it is in the self-interest of business owners and managers to utilize their workforces in ways that allow a better-educated workforce to more fully contribute to the bottom line.  

Not all employers see it that way, of course, and that’s because they make false assumptions about their employees’ abilities, productive potential, and desire to contribute. In this regard, mangers might take note of what SRC Holdings CEO, Jack Stack, has accomplished during the last 30 years with a workforce composed mainly of high-school-educated, blue-collar workers. His Rust Belt company, which manufacturers industrial components for a range of industries—is continually and highly productive, profitable, and growing—thanks largely to the ideas and efforts of employees who primarily manage themselves.

Instead of assuming his workers were dummies, in 1983 Stack set out to teach them what one learns in business school, including how to read and interpret the company’s income and cash flow statements and balance sheet. Then he empowered them to act on the information they had. Employees are encouraged to use their higher-order skills, and for some three dozen who outgrew their jobs and wanted to start their own related businesses, the company funded their startups and went into partnership with them. It works: A share of stock in the company that was worth 10 cents in 1983 (adjusted for splits) is worth US$199 today, an annualized gain of 28 percent over three decades.

In sum, thanks to managerial will and creativity, there is little underemployment at Costco and SRC Holdings, and the beneficiaries are those companies’ workers, mangers, owners, customers, and host communities. If other companies followed suit, the entire economy—and society—would benefit.

James O'Toole

James O’Toole is director of the Neely Center for Ethical Leadership at the University of Southern California’s Marshall School of Business.

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