The Skills Gap Is About Technology, Wages, and Group-Level Irrationality

UPenn has an excellent review of Peter Cappelli’s new book, Why Good People Can’t Get Jobs: The Skills Gap and What Companies Can Do About It. The book’s theme, which Dean Baker has written a lot about, is that there isn’t really a skills shortage in the labor market; the problem, rather, is that employers are reluctant to raise wages in order to attract talented workers.

As the book review notes, technology has enabled firms to employ choosier recruiting tactics. Keyword searches are routinely used to distinguish attractive resumes from non-attractive ones, and firms are increasingly using online assessment tests to weed out uncompetitive applicants.

Firms have chosen the technology-driven approach to attract skilled labor rather than the more traditional approach of raising wages. The idea is that, from an individual firm’s point of view, if skilled labor can be found without having to increase wages, then profits will be higher. It’s a very rational strategy.

But rationality at the individual level doesn’t always translate into rationality at the group level. In fact, if all firms simultaneously employ technology-driven approaches to attract skilled labor without raising wages, then the predictable outcome is that each firm will see a skills shortage in the overall pool of available labor. It’s not a real skills shortage, per se, because a real skills shortage is defined as a situation in which firms are unable to find suitable workers at market-clearing wages. If wages never rise to market-clearing levels, then the suitable workers, even if they exist, won’t ever show up.

An equivalent way of saying the same thing is that, in many ways, demand creates supply in the market for skilled labor. While employing new recruiting technology may be rational from an individual firm’s point of view, the risk is that the technology may contribute to a demand gap at the aggregate level; in which case, it might actually be in every firm’s best interest to raise wages.

But no firm is willing to raise wages individually. What all firms really need, then, is a coordinated agreement whereby they all raise wages for the types of positions that are in high demand. It’s obviously not the government’s role to force such an agreement, but one would think that unions, if they were still around in America, would be playing an important role.

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