Dealing with Skills Shortages in a Complex Economy

This is the second part in EMSI’s analysis of skill shortages. Part 1 can be found here. For more information, email Josh Wright.

Summary: EMSI has developed a new index to help regions better understand employment skills gaps. This methodology is an attempt to provide a straightforward but comprehensive technique for sensing shortages of workers so that regional planners can respond where needed. Of the 41 occupations included in our analysis, 30 were determined to have a low supply of potential workers. The shortage is pronounced among occupations in the healthcare, education, business & finance, and architecture & engineering sectors.

By Brian Points
EMSI Consultant

In our previous post we discussed occupations with potential skills shortages, and observed that jobs that have a lot of demand show increases in both employment and earnings over time. The simple progression is well known — employers target skilled workers that will add value to the company, these same workers are often recruited by other companies, and the resultant competition creates higher wages and benefits. This phenomenon is clearly seen in areas such as software development, where competition between tech companies for talented programmers drives up wages and benefits.

In this post, we want to elaborate on the supply side of this equation. Do occupations with greater demand also experience a commensurate increase in qualified workers? And how do we accurately measure the supply side of this equation?

To lay this out, first imagine that a company is trying to hire an accountant. It will post a job opening on its website, on job search websites, in the local newspaper, at the nearest university, and with local employment agencies. Because of the different places the job was posted, a variety of people will see the new opening. Some of those will be active jobseekers (those who have already submitted a resume for a specific position) while others are passive (those who have posted their resumes online for employers to peruse).[1]  To better understand the different supply of workers, we can place each type of jobseeker into one of three categories: (1) new graduates, (2) unemployed workers with the requisite skills to take the position, and (3) compatible workers current employed elsewhere who have the requisite skills and the proper incentives to change jobs.

Here is a detailed description of each category and where the data comes from:

New Graduates

This is the most commonly used measurement of supply. The primary data source is the Integrated Postsecondary Educational System (IPEDS). IPEDS records the number and type of graduates from every postsecondary institution in the nation that accepts Title IV funding (e.g., Pell Grants, Stafford Loans, etc.). As with any data source, it has certain weaknesses. It can sometimes fall short in terms of accuracy. In some program areas, there can be duplication of graduates. In others, the figures may over-estimate the number of workers who become certified for employment. Additionally, this source does not include the marginal number of apprenticeship completions that also align to specific occupations. However, it is the best source to look to for national data on graduates.

Unemployed Workers

National unemployment data is collected by the US Department of Labor through the Current Population Statistics Survey (CPS). In addition to providing aggregate national unemployment figures, the CPS divides this data into occupations according to Standard Occupational Classifications (SOC). This allows us to tell the difference in 2010 unemployment rates between occupations in which the skilled labor is being nearly maxed out and those where much of the skilled labor is not being utilized. For example, in 2010 the unemployment rate for occupational therapists was a strikingly low 1% compared to 34.5% for telemarketers.[2] The higher the proportion of skilled labor that is employed in that position, the fewer workers can be assumed to be available on the supply side.

Compatible Workers

This is the most innovative and trickiest measurement involved in this analysis. The purpose of this measurement is to estimate the number of workers who are willing and able to switch occupations into categories where their skills are more highly valued than in their current positions. In order to meet the “willing and able” criteria these workers must a) possess compatible knowledge, skills, and abilities, and b) have the proper wage incentive to consider making a career change. Compatibility is measured in terms of EMSI’s proprietary compatibility index, which is based on O*NET competency calculations. (This is a complex process that involves finding the closest match between SOC codes in terms of both ability and importance.)

These categories help us perform a gap analysis, which provides an objective, data-driven look at the pipeline of skilled workers.[3] For each group here is generally what we are looking for:

1. If regional educational institutions (colleges, universities, or other institutions that report to IPEDs) are graduating (or reporting) enough students to match the openings for a particular occupation or set of occupations.
2. If qualified unemployed workers are in the region.
3. If there are enough compatible workers who could transition from other jobs.

A “gap” occurs if the sum of workers from each category is below a certain threshold when compared to the amount of openings for a particular occupation.

When Supply > Demand

If we find an adequate pipeline of workers, we will then look at things like wages and other potential opportunity costs, which might be keeping qualified workers from taking the jobs. Measuring occupational wages is pretty straightforward and involves comparing current wages to the median wage offered in another occupation. If the employer is not willing to pay enough for a certain worker it could explain why there is shortage of workers.

If there are qualified candidates in the workforce but employers cannot find them, we need to better understand why. What combination of factors is required to draw workers from their current jobs (or regions) toward new jobs (or new regions)? There are a whole host of other opportunity costs associated with making a career change. If the cost exceeds the perceived benefits of the change, the individual will likely not switch. Here are some typical examples:

• A person might feel they have already invested time and money in their current position and a risk wouldn’t necessarily reap a greater reward;
• They could think that their current wages will increase if they just stick it out;
• They are constrained to their current job and/or city for family reasons, or perhaps they are drawing a second paycheck through another employer;
• They may not be able to move (e.g., can’t sell the house); or
• They may feel reluctant to leave their current place of employment because of the recession.[4]

At EMSI we have begun to work on a way to analyze this. Based on our compatibility index (see the “Compatible Workers” section for more), we assumed that for jobs with compatible skills and comparable wages about 6.7% of the workforce would be willing to change and actively seek a new opening. To account for lower levels of compatibility we decrease that percentage by one point for each drop in compatibility score.[5] For instance, for jobs that are slightly less compatible but where a wage incentive still exists, such as computer software programmers and computer support specialists, the number is scaled down according to the level of compatibility.

Skills Shortage Analysis

The following table displays the 41 occupations that are commonly reported as having a shortage of skilled workers. The table includes the number of annual graduates, estimated unemployment, compatible workers in other similar occupations, a measure of the potential workers and the average potential-workers-to-annual-openings ratio.[6]

Lower numbers (those below the national average of 14 workers per job) mean that there are fewer potential workers to fill future vacancies, which is what we would define as an actual skills shortage. Conversely, higher numbers (those above 14 workers per job) mean there are more workers that could potentially fill job openings. Note: All of these occupations experienced substantial employment growth and earnings increases between 1999-2010. They are therefore considerably more likely to experience skills shortages than other types of occupations.

Results

This data supports the idea that there is a shortage of skilled workers in 30 of the 41 occupations.

• In healthcare, education, business & finance, and architecture & engineering, 20 out of 28 listed occupations are lower than the national average benchmark of 14 potential workers per job.
• For occupations that fall below the line, some have low ratios due to an insufficient number of graduates (e.g., accountants & auditors and interpreters & translators).
• Some occupations have low ratios because they are so specialized that very few workers from other categories have the skills and necessary incentives to make the job transition (e.g., respiratory therapists, architects, and management analysts).
• For jobs that have a decent number of potential workers (e.g. above 14 jobseekers per opening), we would want to explore wages and learn more about the barriers preventing workers from taking those jobs.
• The occupations with the largest gaps are veterinarians, occupational therapists, accountants & auditors, pharmacists, and physician assistants.
• Occupations with the best potential pool of candidates are claims adjusters, physical therapy assistants, diagnostic medical sonographers, skin care specialists, and service unit operators for oil, gas and mining. Again, when there are larger pools of potential workers but lots of unfilled openings, we need to look at wages and opportunity costs.

Conclusions

1. Educational institutions with a particular focus on the skilled trades need to be looking closely at labor market data and need to have a very solid understanding of workforce demand. This should help facilitate smarter, more responsive education and training, which results in graduates equipped with skill sets that qualify for multiple careers in areas with plenty of demand for the foreseeable future. See this post on mechatronics for more on that.

2. For occupations where educational output is too low, policymakers can encourage greater enrollment and graduation. In-demand occupations requiring the most unique combination of skills should receive immediate attention from educators and workforce development stakeholders.

3. Educational institutions should also keep in mind that if a majority of vacancies can be filled with compatible workers, who may or may not require further education, circumstances in the labor market might naturally draw compatible workers toward these positions. In such cases, greater educational output could result in oversupply and potentially unemployment for new graduates. An example of such a scenario could be operations research analysts — if wages continue to rise for this occupation, many people who are currently working as computer systems engineers and computer systems analysts would certainly consider submitting their resumes for operations research analyst openings.

4. Looking at the group of occupations above the 14.1 threshold can also provide meaningful insight. Among these occupations, there are a few textbook cases of educational overproduction — postsecondary administrators, massage therapists, and physical therapists assistants. If the postsecondary training programs associated with these occupations were looked at in isolation, we might be tempted to think that the demand and supply were relatively equal, but in fact each of these occupations are highly compatible with a number of other occupations, which are typically lower-paying. Hence, the demand for physical therapist assistants can easily be filled by LPNs, nursing aides, and medical assistants who are seeking higher wages.

5. Finding the optimal number of trained workers is complex, but can be aided by a quick study of various labor market data sources and measuring worker compatibility and wage incentives. Using this approach can yield a much more accurate answer than if we relied solely on traditional methods, such as comparing educational supply to projected occupational demand. The data presented in this analysis is by no means the final word on this topic but hopefully a step in the right direction for more comprehensive analysis. We always encourage people to ground-truth the data in order to validate the findings.

Please contact us if you have any questions about this methodology or would like to prepare an analysis for your area.

Closing Note: As we do this, a topic that frequently comes up is the issue of licensure or certification. For example, many occupations do not require any formal certifications. If an insurance salesman wants to become a sales rep for wholesale or manufacturing, no additional postsecondary training is required. On the other hand, if a licensed practical nurse wants to become a registered nurse, it may take a year or more of additional training and new certification requirements. Given this, the amount of time required for workers to transition from one occupation can be difficult to determine. In our analysis we are simply trying to identify workers who are willing and able to make career transitions.

Read more at Economic Modeling Specialists (EMSI blog)