U.S. Small Businesses Hit Hardest by Skills Gap

Thu, Jul 17, 2014 - 1:18pm

Employment in the U.S. has made substantial gains since the end of the Great Recession. The headline unemployment rate continues to decline, and so does the “underemployment” rate, which adds in discouraged workers who have quit the job hunt, as well as those who want to work full-time but can only find a part-time position.


Data Source: Federal Reserve Bank of St. Louis

In spite of this progress, there has been persistent concern among policymakers and analysts about the so-called “skills gap” — that is, the disconnect between the skills that employers need from potential new hires, and the skill sets of unemployed workers.

One data point that demonstrates this problem is the duration of the average job vacancy. On average this year, an American business takes 22.5 days to fill a job — compared to 16.7 days in 2009 and 21.7 days in 2006, when the unemployment rate was about 4.6 percent. In other words, even with much more slack in the labor markets, it’s taking employers longer to find qualified workers.

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The same reality shows up in regular polling of constituents by the National Federation of Independent Business (NFIB), a small-business advocacy group. Their data show that the proportion of business owners reporting that they can’t find qualified applicants has been trending steeply upward since the end of the recession.

Small businesses tend to be particularly hard-hit by this kind of shortage, since they don’t have the recruitment strength of larger employers. Qualified workers are also more hesitant to apply for positions with smaller companies, especially with the memory of a severe economic downturn — they want the security that comes from working for a bigger employer.


Data Source: NFIB Research Foundation

The hard-to-fill positions are not spread evenly throughout the economy; the most commonly cited shortages are in technical trades such as welding and industrial machinery maintenance, as well as in supervisory and management positions.

Reshoring may be partly to blame. The recovery has been occurring at the same time that the U.S. economy is being reshaped by the rebirth of domestic energy production and the nascent reshoring of manufacturing (due to labor cost increases in Asia and competitive energy prices in North America). The problem is that the U.S. economy has not yet had time to adjust to this trend and produce workers who are adequately trained. Another similar factor is retirement. The U.S. labor force participation rate is lower than it has been since 1978.

U.S. Labor Force Participation Rate at a Generational Low

Data Source: Bureau of Labor Statistics

This decline in participation was already underway before the recession, but it has accelerated. In part, it is due to a generational factor — Baby Boomer retirements. But it also shows an effect of the recession: workers who were nearing retirement age and decided simply to retire early in the face of a brutal labor market.

[Read Also: The Skills Mismatch Remains a Fixture in U.S. Labor Markets]

Here’s the other factor affecting companies looking for manufacturing jobs: the long decline of American manufacturing means that skilled workers are older than in other sectors. The average skilled manufacturing worker in the U.S. is now 56. So the pattern of “accelerated retirement” and declining labor force participation has hit that sector especially hard.

The market will eventually correct the imbalance, as workers perceive the advantages of getting training in appropriate skills — but in the meantime it present a headwind for U.S. productivity and consumer spending.

Investment implications: U.S. consumer sentiment and consumer spending correlate with the health of the labor market. Watch economic data closely as economic growth leads to corporate profit growth, which is a primary determinant of stock prices.

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