Can US Employers Close the Skills Gap With Higher Wages Alone? Probably Not.

Can US Employers Close the Skills Gap With Higher Wages Alone? Probably Not.

In a recent column at BloombergView, Michael Strain, an economist at the American Enterprise Institute, asserted that US businesses, particularly manufacturers, protest too much about the skills gap. Their inability to source skilled employees could be solved, he argued, if they were simply willing to pay higher wages for the talent they need:

Wage growth is picking up, but it is lower than what many economists expect in light of overall economic conditions, and it is not soaring for specific industries.

Simply put, if businesses can’t find workers — or can’t find workers with the right skills — they should raise their wage offers. Basic supply-and-demand logic suggests that doing so will broaden the pool of workers interested in the job, and will make the job more desirable to applicants. In addition, raising wage offerings would likely draw in some of the millions of Americans who report they want a job but are out of the labor force. So unless wage growth picks up, the warnings about labor shortages will fall flat.

Strain is not the first economist to argue that the skills gap is a simple supply-and-demand problem that could be solved by raising the price of labor, or that the problem is on the demand side (not enough attractive jobs) as well as the supply side (not enough skilled workers). Stagnant wage growth may be a factor in US employers’ labor market woes, but in focusing exclusively on wages rather than training and hiring barriers, Strain’s claim oversimplifies the challenge employers are facing. Years of research consistently tell us that while competitive compensation is a large component of what attracts candidates to jobs, there’s no simple formula by which you can convince any given candidate to take a job simply by offering a high enough salary.

It’s easy to point to “basic supply-and-demand logic” to criticize manufacturing companies when you don’t actually understand their experiences in local labor markets, but who says manufacturers aren’t trying to raise wages already anyway? A 2015 study by the Manufacturing Institute and Deloitte showed that 80 percent of manufacturing companies were already willing to pay more than market rates to reduce the skills gap—especially for more skilled labor, such as machinists, craft workers, and industrial engineers. Yet according to our own research at CEB, now Gartner, only 23 percent of heads of HR in the manufacturing industry believe they can close critical skills gaps over the next 12 months.

One problem manufacturing companies face is that there are diminishing returns on how much raising wages can actually increase the attractiveness of manufacturing jobs, to a point where attracting the right type and number of skilled workers by salary alone would break the bank. Compare this to the finding in Glassdoor’s recent study on labor mobility that increasing salaries by $10,000 has only a small impact on candidates’ willingness to move cities. Some candidates just aren’t going to move to your city for any reasonable amount of money. In the same vein, when manufacturing jobs are no longer seen as “good jobs” that offer the kind of prestige, long-term security, and middle-class comfort they used to, it’s harder to get candidates interested in them when they have other options. The candy company Mars, for example, has still had to innovate to attract a new generation of employees even though it already offered highly competitive rewards and was regarded as a great place to work.

Candidates don’t only care about wages; they care about a value proposition. Wages and benefits are a huge component of that proposition, but there are other components that can’t be bought: location, career prospects, work-life balance, quality of life, health and safety—you name it. Meanwhile, employers must design and market these offerings to candidates in competition with other companies that can sometimes provide a much better or more accessible value proposition. According to the same basic supply-and-demand logic Strain cites, manufacturing employers would already have increased wages if that were the most effective way to reduce skill gaps.

Unfortunately, as manufacturers likely know, it’s not. Skills shortages are a real problem, with today’s workforce not building skills fast enough to keep up with the pace of change: something both employers and employees know. That’s why some American manufacturers and other employers are pouring money into learning and development, particularly focusing on the digital skills that are in short supply and high demand. And of course, especially for manufacturers, the US opioid epidemic has shrunk the overall pool of labor by idling or disqualifying candidates who might otherwise be willing and able to fill these jobs. Raising wages might pull some potential workers back off the sidelines, but it can’t solve all the problems in the US labor market today.