In a 2015 paper, labor economist Peter H. Cappelli of the Wharton School of Business argues that “very little evidence is consistent with the complaints about a skills shortage, and a wide range of evidence suggests the complaints are not warranted.” Among many data points he references are figures from a 2013 study reflecting that, while many employers recognized that the chief challenge to meeting their skilled labor needs is that workers would not accept work at the pay rate being offered, only 5% of employers among those struggling to find skilled workers were responding by offering higher salaries to attract higher skilled labor. The analogous report from the ManPower group in 2018 shows some improvement, however, as 29% of employers in the same scenario are now offering “higher salary packages” and 32% report “offering additional perks and benefits.” As with geographically mismatched markets and worker mobility, the most direct way to increase the supply of skilled workers and incentivize skill investment is the credible promise of higher pay and better working conditions. While this is a key suggestion of this report, it is not necessary or desirable for this strategy to involve public policy, except to the extent that policymakers can take a step back and avoid crowding out private businesses’ natural market responses to labor shortages.
Licensing and certification
One source of labor market rigidity that mechanically restricts the supply of skilled labor is occupational licensure, certification and other barriers to job entry. The main effect of this is direct and intended. Existing licensed workers within a field face less competition for jobs and receive higher wages, other things held constant, when the state imposes licensing requirements on would-be workers. From the employer’s perspective, though, they have to increase wages even further to incentivize would-be workers to undertake the state-mandated training and testing required for licensing or certification, which may not necessarily even provide them with the skills needed to perform the job they are seeking.
But there are indirect effects, as well. Those who choose to become licensed or certified by the state — undertaking more coursework, on the job training, or test preparation — increase demand for those services. This increases the prices of these services and reduces program capacity where the services are provided through the public sector. Another indirect effect of licensure that also slows the closing of any skills gap involves migration. Where reciprocal licensing agreements between states do not exist, migration is disincentivized, further insulating existing in-state license holders by reducing interstate competition and further hampering businesses’ ability to find skilled labor.
A 2017 report by Jarrett Skorup of the Mackinac Center for Public Policy makes many recommendations of alternatives to licensing, in addition to allowing interstate transfers where licensing exists, all of which would be beneficial in reducing the perceived challenges in skilled labor markets. Michigan’s entire licensing regime should be reviewed systematically, and licensing requirements that do not clearly protect public health and safety should be eliminated.
Workforce development politics
If it is less costly for a business or industry to convince policymakers to help them overcome the challenge of meeting the skills gap than it is to train workers themselves or pay them sufficiently to invest in their own skills, businesses will pursue political solutions rather than market solutions. This cronyism, though logically coherent, is not good for the state of Michigan and taxpayers. It is clearly beneficial for the businesses who are successful in these efforts. Not only do they benefit because taxpayers end up footing the bill for training their employees, it also would boost these firms’ labor supply, putting downward pressure on the wages they would need to offer to attract workers. While the beneficiaries and benefits are easily identifiable — businesses get the skilled workers they need — the costs are diffuse and often unseen. All of us pay a little more in taxes or forego other services that are genuine public goods that government can provide, such as public infrastructure, policing and the courts.
Alternatively, market solutions would assign the costs of employing skilled labor on the entities who benefit from it: the businesses that profit from labor productivity. Such market solutions are not revolutionary and certainly not technocratic; they include allowing each business to determine what combination of the following is appropriate for their operation: increasing wages for skilled labor, improving work conditions, increasing skilled workers’ benefits or providing the training for otherwise qualified employees.
If skilled labor is more productive, as the argument goes and reality bears out, firms should be willing and able to pay more in the form of salary or nonpecuniary benefits. They might also incur the training costs themselves, sending employees to off-site training facilities, hiring external trainers or providing intentional on-the-job training. When skills obtained are specific to the firm, the business will not need to worry about the worker leaving with his skill for another firm. But even where the skills needed are general and thus valuable to other firms, as argued by Nobel Laureate Gary Becker, a given firm can still provide the training such that employees “pay” for it by accepting lower wages. (Notice how this also addresses employees’ credit constraints without public subsidies.)
Both employers and employees have the incentive to pay for what is valuable to them, so no central directing agency need organize it. This is more complex only where wages cannot adjust downward, like in unionized industries where labor leaders set artificial floors on wages. In this case, general skills can be provided by an industry organization in order to eliminate the possibility of free riding by firms that provide no training to their employees.