Skill Mismatches in the U.S. Labor Market
SKILL MISMATCHES BETWEEN AMERICAN WORKERS AND AMERICAN EMPLOYERS
The slow recovery in the United States from the Great Recession has been characterized by an unusually high unemployment rate. Observers have disagreed about the relative importance of skill mismatch and insufficient aggregate demand as causes of high unemployment. The two explanations are not mutually exclusive, but Paul Krugman (2014) has taken a strong position on the issue by totally rejecting the merits of the skill mismatch explanation. In his typically colorful language, he dismisses skill mismatch as a “zombie” argument.
However, empirical evidence about skills demanded by employers and skills offered by workers indicates that a mismatch of skills cannot be rejected for certain kinds of labor. Data from the two opposite ends of the education spectrum indicates skill shortages that are attributable to binding quotas on immigration of workers. Employers are unable to hire enough high-skilled workers subject to H-1B visas, and farmers are unable to hire enough legal agricultural laborers to plant and harvest crops. Current visa programs are so restrictive and cumbersome, that employers have reluctantly settled for hiring a large percentage of illegal workers. In a dynamic economy, there are always temporary mismatches between specific skills demanded by employers and those currently supplied by workers. Indeed, the process of workers adapting to technical change has been described as a race between technology and education. However, the current skill mismatches are larger and more persistent than ordinary skill gaps. The cumbersome visa programs act as a friction that makes the labor market less responsive to changes in the demand for specific skills than it would otherwise be.
Employers who are unable to hire enough high-skilled workers regularly apply for H-1B visas that give them the right to hire qualified foreign workers for at least 3 years. The U.S. Customs and Immigration Service (USCIS) administers the program, and their rules require that application fees for visas and lawyers’ fees must be paid by employers, not employees (West). There is a quota of 85,000 (65,000 with at least bachelor’s degrees and 20,000 with at least master’s degrees) visas per fiscal year, and visas are typically exhausted within weeks after the April 1 opening, as they were this month for fiscal 2015. Getting access to high skilled workers is valuable for employers, but time and resources spent on the visa process are costly. Firms unable to obtain visas can partially offset their loss by outsourcing services to foreign firms. In some cases, the foreign firm may hire the same worker the American firm wanted to hire with the H-1B visa. The mobility of Indians moving between employers in the U.S. and Hyderabad has been documented. A recent example of a company trying to circumvent the visa restriction is the case of a California start-up, Blueseed. They have proposed to build a platform in the Pacific Ocean just outside the U.S. territorial limits that would house high-skilled workers who would not require H-1B visas (Slaughter). The mismatch between employer demand for high-skilled workers and the supply of high-skilled workers with visas is not an illusion or a “zombie”. The persistence of the mismatch over many years also indicates that it is not temporary. Technical change biased toward using more high-skilled workers has contributed to the mismatch. The size of the mismatch does vary with the state of the economy, and the shortage of high-skilled workers was smaller during the Great Recession.
Shortages of qualified workers have been especially severe in science, technology, engineering, and mathematics (STEM). Shortages could be satisfied by hiring foreign-born graduates of U.S. universities. They know English, and they are already familiar with the American culture. A network for obtaining STEM workers already exists, as the majority of Ph.ds granted by American universities in recent years in engineering, certain sciences, mathematics, and economics have been earned by foreign nationals. The large contribution of immigrants to start-up businesses, especially in STEM-related fields, has been well-documented (Slaughter). Earnings of immigrant STEM workers are above the average earnings for all occupations, and these relatively affluent workers are not burdens to U.S. taxpayers. Legislation that would increase the number of H-1B visas and relax other restrictions on high-skilled immigrants was passed by the Senate in 2013, but the bill has not yet been acted on by the House. The allocation of visas to workers would place greater weight on the skills of immigrants compared to the current allocation mechanism that heavily emphasizes family reunion. The Senate bill is comprehensive and includes both high-skilled workers, for whom legality is not an issue, and low-skilled workers, for whom legality is a very contentious issue.
Under current working conditions and compensation, farmers cannot hire enough Americans to plant and harvest their crops. Immigrant workers with little formal education are willing to do the work, but visa restrictions result in as many as 50% of farm workers being illegal. A study of New York state farms concluded that over 800 farms would be at risk of closing if access to immigrant labor were severely restricted. Under current visa rules, farm employers are severely constrained in hiring legal immigrant workers. The largest legal guest worker program is operated by the North Carolina Growers’ Association. (News and Observer) The Deputy Director of the Association described the program as “cumbersome and expensive” and he recommends using it only as a last resort. The program uses the H-2A visa that allows employment of temporary workers for up to 10 months per year, and it brought in 8,700 workers in 2012. Legal H-2A workers are more expensive than illegal workers, and the higher costs cannot be ignored by all employers. The Growers’ Association charges individual farms $1000 per worker per year. The services rendered. Include paperwork, transportation from Latin America, and mandatory training. The Association advises farmers to apply jointly to allow workers to rotate among farms. The mismatch between demand for agricultural workers and supply of legal workers is not temporary and it is not an illusion or a “zombie”.
Skill mismatch exists at both ends of the education spectrum. Highly skilled immigrants and their prospective employers face binding quotas for H-1B visas. Agricultural employers cannot hire enough American works under current working conditions and compensation levels. They could hire willing immigrant workers, but visa rules do not allow them to import enough legal immigrants to complete their planting and harvesting. Skill gaps at both ends of the educational spectrum are large and persistent. Facts contradict the claim that skill mismatches are non-existent, illusory, or “zombies”. Skill mismatches could be reduced by prudent immigration reform, but that would require compromise by a Congress that has repeatedly demonstrated its unwillingness to compromise on a long list of other issues.
Krugman, Paul. 2014. “Jobs and Skills and Zombies”. http://www.nytimes.com/2014/03/31/opinion/krugman-jobs-and-skills-and-zombies.html?_r=0
News and Observer. 2014. “NC Farmers Look to Visas” April 14.
Slaughter, Matthew. 2014. “How America Loses a Job Every 43 Seconds”. Wall Street Journal. March 25.
West, Darrell, 2014. “H-1B Visa Cap Applications Show Need for Immigration Reform”.
35 Responses to “Skill Mismatches in the U.S. Labor Market”
What an abysmal analysis of the H-1B. The crowning jewel in the skills gap argument is that companies request a lot of H-1Bs. I request dozens of Maseratis filled with super models annually and always fall short. Where's the outcry? No evidence is presented regarding WHY they ask for these or why substitutes (domestic, experienced) are avoided. There is no discussion of how the visa is primarily used for offshoring nor how that industry flat out ignores six major principles of American labor and discrimination laws while all but refusing to hire citizens. It compares apples to fruit markets comparing salaries of educated/skilled H-1Bs to the average US citizen–physicists and bus boys lumped together. But it doesn't compare the former salary of the laid off worker to that of the recently onshored filling part of that role.
I know the author knows a great deal more than my intro to econ classes decades back yet failed to address a decade of stagnant wages in a high-demand field. First day econ tells us supply and demand are inversely relational forces acting on each other that generally adjust the cost until the two reach equilibrium. But let's not bring common sense or the most basic principles into the argument. They might clarify the issue.
If there is a skills mismatch, some positions must go unfilled due to labor supply shortage. Accordingly, we should see wages rise in those fields. Which fields are these?
Any employer that claims that he cannot hire enough workers certainly forgot his intermediate micro. Offering a higher salary should both lure workers from other firms in the short-run, and draw more people into that line of work in the long run.
I've got a shortage of Audis in my household; I simply cannot find enough Audis to satisfy my needs at my desired price.
I miss the point about H-1B visas being used for offshoring. Businesses apply for the visas
for the right to hire high-skilled workers to perform work in the U.S. This is the opposite of offshoring. There is evidence that H-1B visas and offshoring are substitutes for each other. The Maserati example seems misplaced. I presume you don't obtain Maseratis because they are not free, and you cannot afford them. Skilled workers are not free either. Employers must pay competitive salaries plus application fees plus legal fees and they still
face binding quotas.
Surely supply and demand are relevant to markets for skills. However, the supply of high-skilled workers is constrained by government imposed quotas on immigrant labor. Workers with the requisite skills are willing to work at competitive salaries offered by employers, but they are prevented from working legally by visa limits. The quota on visas is the key point here. It would be possible to add an element of competition, while retaining the quota, by auctioning visas to the highest bidder.
My earlier comments about Maseratis are also applicable to Audis. Employers who apply
for H-1B visas do not simply "desire" workers. They are willing to pay competitive salaries
and benefits plus application and legal fees. In many cases the relevant workers are already employed by a firm (perhaps as an intern), and both parties want to extend the employment relationship. Microeconomics is certainly relevant here, and supply that is constrained by an import quota or an occupational license is very different from one in which workers are free to enter occupations.
That is the story and the Kool-Aid the proponents want you to drink–especially those proponents who only want caps raised or eliminated. Offshoring companies have long been among the largest users of the visa and for the past three years have taken more than all other corporate uses COMBINED. The unfindable scientist or best and brightest we're so often told of is barely better than fiction.
The offshoring companies use the visa to all but refuse to hire domestic workers. The usual model is that a client company lays off their IT staff in conjunction with bringing in an offshorer. The offshorer supplies enough analysts to collect requirements and send the bulk of the once domestic work offshore. They are notorious for hiring primarily males who are young and who are most always from the same foreign nation. They expect outrageous working hours and pay well under market for the skill. $60K is fantastic for a janitor in Montana but downright laughable for a software developer in Silicon Valley. Given, too, that the workers must return home if they cannot procure other employment in a short period, some aspects of indentured servitude even come into play.
While I admit the supermodels comment is of little value beyond unnecessary effect, the Maserati analogy more or less fits once you understand how the visa is used above all other purposes. Were the government to open a program that made Maseratis (workers) available at 60% of their actual cost (salary), allowed them to be driven twice as much (hours worked) and made them very unlikely to break down (indentured), I might more plausibly put a couple in my garage.
Supply and demand is being skewed. We've been told for over a decade IT talent is in short supply, yet wages in the field have been relatively stagnant, so something isn't letting S & D work. It's also suspect to just claim that a cap on the visa is detrimentally restrictive. At any given time, due only to those currently in the US on H-1B, the IT workforce in the US is already 10-20% larger than it would be if no immigration existed. Factor in L-1s and the proverbial alphabet soup plus hundreds of thousands of green cards in the field and you're talking about a fairly significant ballooning over what the native labor pool produces. Also, given that the US has access to the majority of the offshore talent without ever bringing it onshore, we would seem to have 3-5 times "our share" of the talent. While not pure free market, that doesn't seem very constrained.
I don't doubt that we could use some redirection as to how future generations view STEM. But reliance on a crutch of crowding out our own talent by importing others fails the basic common sense test that it's doing anything to entice interest in careers that may only have a 15 year lifespan.
You are speaking to the minority of applications. I've said many times in the course of following this topic that I'm not wholesale protectionist. But skilled immigration as it exists today in the US is more a tool to alter the regional economics and get cheap labor than the "best and brightest" arguments that are more theory than reality.
Some of the biggest users are Indian-based firms (Infosys, Wipro, Tata Consultancy), but also Microsoft, Oracle, and Intel. On the subject of pay, the applications must include the pay offered by the employer, and data are available on the internet. The law requires employers to pay prevailing salaries. I think I now understand your earlier point about how hiring foreign nationals with H-1B visas is "offshoring to the US". The services they provide is onshoring by US firms, but their employment can be thought of as training in the US for later work in other countries.
However, this type of "on-the-job" training is part of a bigger training process. The same workers also got bachelor's and graduate degrees from US universities that could prepare them for later work in other countries. This export of services by U.S. universities is usually considered to be a valuable experience for both foreign students and U.S. educational institutions.
Since the Great Recession, earnings have grown slowly for some skills and they have fallen for others. However, earnings of recent gradates with bachelor's degrees in STEM fields have exceeded average earnings for all bachelor's degrees, and a comparable premium has been earned by STEM holders of graduate degrees. There is a skill premium that varies by major. Of course, wages in a skill category could have been higher if fewer immigrants were admitted.
Matthew Slaughter has written about the high quality of skilled immigrants, including their
disproportionate contribution to starting new businesses. These start-ups must occur after
the workers' temporary employment with H-1B visas. Also the average quality of foreign-born
faculty members at U.S. universities is better described by the "best and brightest" model than the "cheap labor" model.
First off, let me apologize for addressing my challenges as acerbically as I began. Following this topic I've found a large majority of the articles to be intended more as a one-sided sales pitch than an interest in meaningful discourse.
Last year, Norm Matloff addressed the significant minority players (MS, Oracle, etc.). While I find the outsourcers much more egregious, he did find that for all of MS’ much publicized $100K jobs, a rather small minority of their technical roles actually paid that. Their pay is notably more in line, though, than offshorers.
The attestation of salary is easily gamed. “Prevailing wage” is essentially $60K with little consideration to where the job is or job level. Again, while it may seem prima-donnaish to complain about that number, it’s an in demand, high-value skill that only a fairly small minority possess. 60K is roughly national average for day 1 out of college. The “need” is a case of foxes watching the henhouse. They attest and that is accepted. If they claim they only need 90% 20-somethings, then that is accepted. IT has turned into a field where a disproportionately high number of practitioners are being pressured out by age 40. We’ve flipped careers on their head in this scenario. At a time when lifespans make us question the 65 retirement age, one of the better non-physical careers is getting easier to be blackballed from sooner and sooner.
To the educational aspect, that too is more problematic (to me) in how current policy is exercised, than in general principle. The educational system gets an unlimited supply of H-1Bs which they use to gain advanced skills at a fraction of their value. It’s no wonder domestic students show little interest in grad school while domestic schools have little incentive to attract domestic students. To the path beyond college, my guess is most would still come even with diminished opportunity to stay thereafter. Schools still mostly benefit, foreign students still get the education and domestic students have the deck less stacked against them.
As Adam Smith pointed out Corporations oppose free markets and corporate advocacy of H-1Bs is an example corporations seeking to avoid the free market by having government push down the price they have to pay for labor by increasing the supply with foreigners. How did American employers get the skilled workers the needed before the government put them on the government dole with the H-1B? They went on the open market and paid up to get them. Having skills in short supply meant that your wages were going up. Wages for those with the skill sets H-1B workers are currently being used for are not going up which indicates there is no shortage.
Nobel economist Milton Friedman called the H-1B a subsidy saying
"There is no doubt, that the [H-1B] program is a benefit to their employers, enabling them to get workers at a lower wage, and to that extent, it is a subsidy."
Senator Bernie Sanders (I-Vt.) says
"What many of us have come to understand is that these H-1B visas are not being used to supplement the American workforce where we have shortages but, rather, H-1B visas are being used to replace American workers with lower cost foreign workers."
Former Senator Robert Bennett (R-Utah) remarked,
"Once it's clear (the visa bill) is going to get through, everybody signs up so nobody can be in the position of being accused of being against high tech. There were, in fact, a whole lot of folks against it, but because they are tapping the high-tech community for campaign contributions, they don't want to admit that in public."
Former Representative Tom Davis (R-Va.), said,
"This is not a popular bill with the public. It's popular with the CEOs…This is a very important issue for the high-tech executives who give the money."
You seem to know a great deal about the operational details of the visa process, and you are uncomfortable with it. Are you bothered by the fact that the process seems to allocate H-1B visas disproportionately to workers in a narrow skill category? That would concentrate any salary reduction on a narrow set of domestic workers. If that is your objection, would you be more comfortable if the same total total number of visas were offered but they would be auctioned to the highest bidder? This would probably spread the visas across a wider range of skills. Auctioning visas has been advocated by Gary
Becker and other economists. An alternative objection is that the total number of visas and immigrants is too big, regardless of gets the visas.
Understanding there exists some price point where it's untenable to pay for a skill, I see little reason for comparison between bachelors. That disparity has largely existed all along. If the value and scarcity of the skill is on par with attorneys or doctors, there's little reason to not judge it in that light vs. number of years spent in school. While demand for the other skills has been largely met or exceeded, demand for STEM has consistently been claimed to be unmet. This tells me that the disparity should've grown. Like most things, the answer lies in the middle. I don't ask we halt immigration–just that we curb its use as a tool against citizens.
Replying to n65321: Adam Smith was an ardent supporter of free trade. He did observe that companies that competed with imports supported tariffs. Companies that imported components of their products (wheat to make bread) opposed tariffs. Exporters also opposed tariffs against their own products. Adam Smith did not oppose cheaper imported products or labor.
You quote Milton Friedman on visas as a subsidy. I have seen references to such a comment but I have never seen the source. Could you provide the source? Friedman was a proponent of free trade and liberal immigration, and it would be curious for him to regard
imported labor as a "subsidy". Of course, it benefits employers and consumers of the final product without requiring any payment by taxpayers.
Replying ton65321 on quotes from Bennett and Davis:
On paying lower wages to H-1B holders, the law requires payment of prevailing wages to
immigrants and the publicly available applications must state the wage offered by the
employer to the employee. Employers of skilled immigrants gain, buyers of the services
provided by the companies employing visa holders gain, and skilled immigrants gain. Domestic workers who compete with visa holders lose and oppose the program. Politicians respond according to how important these winners and losers are in their districts. No doubt campaign contributions are welcomed by politicians.
I am largely concerned with the concentration as you mention. It leads not only to the salary depression, but also discrimination against citizens for not being whatever foreign population has "come to power" within a department.
I am intrigued by the economic simplicity that an auction brings to mitigating the problems. Tiered pricing (fee = $X,000 / 10% dependence) might have similar effect. Such ideas tip the scales away from using it for cheap labor without making it impossible to acquire "must have" talent. In principle, I am interested in some of the provisions last year's senate bill proposed. In practice, companies seem much more adept at finding ways around a rule than government is at creating and enforcing one. But without something to curb the indenturing tendencies, most any financial controls will likely fall short. Extending the period between jobs before deportation would be a step as well as simplifying the whole visa process.
Ideally, a real prevailing wage at least in the vicinity of the mean across skill levels within each region would be introduced as well.
To your last point, it's not so much a matter of total number, etc. Some throttle must exist simply because as a sought out destination, the US quickly goes from 315 million to 700 million in a decade and likely loses any sense of what it is has a monumental infrastructure challenge heaped on it. The real issue at a general level is how immigrants' economic hardships are used as a tool against citizens. Willingness to leave a worse place and better your life is not a trait I find fault with. Companies using policy to prey on that desperation to overwork and underpay while using that against me for their own profit is what this is all about.
Slaughter is a Kool-Aid salesman, at least what I've seen of him lately. He trots out reports other similar groups use and makes sure to not give the whole story. 1/4 STEM company figures don't tell you % of founders vs. representation in the field nor how much of the revenue and employment those companies specifically create.
Kauffman found immigrants start companies at twice the rate. The same report also said self-employment is at an all-time high.
PNAE's 40% of Fortune 500 companies: The stat is imms AND their children at least partially founded. Same definitions say 95% of F500 are native-founded.
Putting the studies these groups point to together they tell you imms–comprising 16% of the business owning age–own (whole or part) companies that create 10% of jobs and 5.3% of GDP.
They're just people like the native-born–not superhuman.
I think your last statement says more about what finally drives the whole debate beyond all the other words we've all said.
Reply to john80224 on auctions:
Auctioning visas to the highest bidder would spread the visas more broadly and reduce
the probability that immigrants would dominate a department within a firm. The current
system is like indentured servitude in that it ties the worker to a specific employer. One
could change this feature by allowing workers to change employers if they got better
job offers. The possibility of changing employers would also protect workers against
low wages. If an employer who bought a visa lost a worker, he would have a right to search for another worker and make him an offer. It would also be useful to make the visas
Replying to john80224: An article on auctioning visas by Gary Becker and Edward Lazear
can be found here: http://online.wsj.com/news/articles/SB10001424127…
It is my understanding that H1-B holders cannot freely change jobs after they are in the US. That severely limits their bargaining power, so why wouldn't we expect them to be paid less than US workers with the same skills? I don't think the "prevailing wage" limit is a hard constraint in occupations where there is so much hard-to-measure variation in skills and skill requirements among jobs and candidates.
Relative to EdDolan's comment about why H-1B visa holders might be paid less than
American permanent residents because they can only work for one employer: The dollar value of the offers must be specified by employers on their applications, and the results
are available on the internet. They are not easy to interpret because of variation in quality,
experience, cost of living differences, etc., across locations. Competition is reduced by not
allowing workers to change employers, but the offers listed by employers in visa applications must be close to what immigrants could earn in the next best job or they
would not be able to hire immigrants. Many reformers, including the late Gary Becker, have suggested allowing workers to change employers if they get a better offer, and this would make the process more responsive to changes in demand and supplies for skills.
This recovery has not been slow for a balance sheet recession. We have only had two or three in the US and the worldwide average to get jobs back is 7 years. It took the US less than six!
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