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Economic Forces Are Squeezing Growth PotentialBut HR Can Unlock a Prosperous Future

March 1, 1998
Related Topics: Growth, Workforce Planning, Featured Article
You name it. If it's got an American label, there's a demand for it. From Disney vacations to Boeing airplanes, U.S. businesses have been operating at breakneck speed to keep pace with the world demand for American goods and services. Overall, it has been great news for the U.S. economy. Since the early '90s when America experienced its last recession, the country has enjoyed an economic boom. For example, in 1996, our gross domestic product was $7.6 trillion compared with only $4.9 trillion in 1991. And our nation's inflation rate is now a meager 2.9 percent.

But America's current eight-year growth spurt is showing signs of becoming seriously stunted by a lack of workers who have the specialized skills needed for today's Information Age jobs. It has been getting harder and harder for human resources managers across the country to find enough workers with the right knowledge to get the jobs done, the products made and the services delivered. You're probably among them. And you've probably been wondering what's going on.

The problem has its roots in many areas, including a severe labor shortage, an education system that isn't preparing students for real jobs in today's workforce, and a global business environment that's putting extreme pressure on U.S. companies to keep production up while keeping prices and wages down. Call it the '90s version of trickledown, but an insatiable demand for jobs at the top of the employment chain is wreaking havoc on the entire labor market. But make no mistake: These workforce problems are so foreboding and prevalent that the United States may be headed for economic disasters such as inflation, another recession or even a complete standstill on the world business frontier.

The story here is: Never before has the push and pull of business growth been so directly tied to skilled labor. And never before has the issue of skilled labor been so intimately tied to our economy. Perhaps it's overstating the situation to say that our nation's economy rests squarely in the hands of our country's human resources directors. At the very least, each individual organization's growth over the next several months and years will be directly tied to how human resources professionals plan their workforce strategies. It's going to take a whole new perspective on the economy and new workforce tactics to outgrow the problem and flourish. Reading this article will give you a good start.

The labor problem isn't going away anytime soon.
You'd think that the incredibly low U.S. unemployment rate that has been hovering near 4.6 percent for months (it hit this 24-year low last November) would be helping the economy. After all, the more people who are in the labor force, the more our nation can fertilize American business growth. Because more people are working -- now 132 million -- more jobs are being filled and more American goods -- with those coveted American labels -- are being created.

But, as the Workforce cover story in November 1996 pointed out: "Low Unemployment Is Causing a Staffing Drought." While economists and labor experts agree that low unemployment is good for workers and contributes to a healthy economy, actually it has made U.S. businesses fierce competitors for labor. For example, Service Marine Industries, a $100 million shipbuilding and repair company located in Morgan City, Louisiana, is recruiting across the country and offers $50 just for qualified applicants to show up and take a craft test. In Detroit, Sears, Roebuck & Co. has found itself so strapped for workers that it now offers charities $100 for each person the company hires from a recommendation. The Boeing Co. based in Seattle, is hiring 150 to 200 employees each week -- including candidates from some of its prime suppliers. And now many of those companies are falling behind on deliveries to Boeing because they don't have the labor force to keep up.

Aerospace giant Boeing might serve as a harbinger of problems that lie ahead. It's scrambling to ramp up production to meet the enormous demand for new airplanes. In 1996, the company hired 21,000 new employees and added 17,000 more in 1997. The company's purchase of McDonnell Douglas -- a move necessitated by the tight labor market -- netted the firm another 62,000 workers last year. Altogether, Boeing now has 232,000 employees, the highest figure in its history. Nevertheless, it's mired in costly delays and has had to incur an enormous $2.6 billion pretax charge against earnings. For 20 infamous days last summer, the assembly line didn't move.

The U.S. education system isn't propelling the labor force, or the economy, forward either. Instead of pumping a steady stream of graduates into U.S. businesses, our nation's schools are sending fewer and fewer high school and college students into the workforce with the skills employers need. "The American education system simply isn't turning out sufficient numbers of people who have the skills needed for the 21st century," says John Hughes, president of Rhythm and Hues, a Los Angeles-based animation and digital-effects studio, which won an Oscar for its work in the film "Babe."

Make no mistake: These workforce problems are so foreboding the United States may be headed for economic disaster.
Hughes has served on the California State Superintendent's Task Force on the Visual and Performing Arts. "Cutbacks in education and a lack of emphasis on the skill sets needed for the Information Age are taking a toll. Finding people with both the aesthetic and technical capabilities is becoming more difficult all the time," complains Hughes. Although he's not lacking for applications (he receives about 140 for every job opening), "There are precious few qualified applicants," he explains.

And then there are shifting U.S. demographics that are also grounds for worry. The oldest baby boomers have already begun to retire, and a larger wave will follow over the next couple of decades. Although John Challenger, executive vice president of the Chicago outplacement firm, Challenger Gray & Christmas, and others predict that many of these "restless retirees" will stay in the workforce at least part time, a smaller pool of people entering the labor market could cause an ongoing shortage that might haunt U.S. companies for decades. Without the brain power to compete globally, the economy could find itself in an ugly tailspin. "At some point, the whole system could begin to crumble," he warns. In the future, all this could affect the ability of U.S. companies to compete in a ruthless global market.

"We're undergoing a period of transition and turbulence," says Carol D'Amico, senior research fellow at the Hudson Institute, an Indianapolis think tank that produced the "Workforce 2000" and "Workforce 2020" reports. Adds Phyllis Eisen, executive director of the Washington, D.C.-based Center for Workforce Success, the educational arm of the National Association of Manufacturers, "This is a growing national crisis, and one that involves demographics, education, technology and a growing skills imbalance -- all exacerbated by a strong economy."

In a sense, America has become a victim of its own success. As companies have successfully introduced technology and automated work, they've been able to eke out greater profits on slimmer margins. Although some observers and critics of technology have long asserted that machines would put people out of work, so far it hasn't happened. Technology has created plenty of new jobs, but it has also decimated a mind-boggling array of existing positions. "The problem comes from people not having the appropriate set of skills for the technology. There's a huge skills mismatch occurring as we move from an Industrial Age economy to an Information Age economy," explains Joel Kotkin, a senior fellow at the Pepperdine University Institute for Public Policy in Los Angeles.

In some industries and communities, the skills mismatch has turned the labor market upside down. While large companies find themselves laying off thousands of workers, other employers complain about the sheer dearth of bodies. "The problem," says D'Amico, "is that the people getting laid off are high wage and low skill. They're finding themselves with abilities that simply don't match their employers' needs. And they aren't willing to accept a job for less than they previously were being paid." All of which lead us to the next big economic growth problem -- the wage squeeze.

The wage squeeze puts pressure on the economy.
After several years of stagnation, wages once again are climbing -- particularly for computer programmers and software engineers. According to the Bethlehem, Pennsylvania-based National Association of Colleges and Employers, starting salaries for computer science graduates have risen 7.8 percent over the last year. In fact, at Rhythm and Hues, a novice digital animator can now pull down upward of $80,000 a year.

"A labor shortage isn't necessarily a bad thing. When people can't find enough labor, they raise wages to attract qualified people," says Lawrence Mishel, research director of the Economic Policy Institute, a Washington, D.C. think tank. If companies across the nation raise wages, it stimulates the economy because people presumably have more discretionary income. However, if wages are overly elevated (wage inflation), the prices of goods and services also can start to rise (inflation) sending the economy into a fatal crash. So far, strong competition and intense pricing pressures have managed to keep the lid on wage inflation.

However, some companies, including giants like Boeing, can't meet production schedules and are now feeling the effects on their own bottom line. They're among those firms that are finding it difficult to hold the lid on wage and benefits increases. "Right now, many employers are unable to find enough workers at the wages they want to pay. Some of them have raised the bar on qualifications, but they haven't increased wages or salaries," says Mishel.

Others have. Service Marine Industries, for example, has had to raise wages 30 percent over the past 18 months. "We simply can't find enough skilled workers to fill all the positions during the current boom," says Peter A. Husta, director of sales and marketing for the company. Indeed, Husta is feeling the squeeze. With more than 200 open positions, the company is hiring qualified welders and electricians on the spot -- providing they pass a drug test and background check. Wage increases can be a good HR strategy to help firms staff up.

So can the idea of providing other monetary incentives. A growing number of companies have turned to the use of stock options, which have allowed them to compensate employees generously but keep actual wages relatively low. Approximately 30 percent of 350 of America's largest companies provide for broad-based stock-option programs, according to a 1997 study by William M. Mercer Inc., a New York City-based, international HR consulting firm. As long as the great bull market of the '90s marches forward, many educated and skilled employees are likely to remain content. If a prolonged bear market rears its head, however, workers probably won't view stock options as favorably. Experts warn HR to look at the effects of using wage hikes or other benefits strategies to boost staffing.

"[It's] OK, as long as productivity gains keep up with the acceleration in wages," observes Mitchell J. Held, co-manager of U.S. economics at Salomon Smith Barney in New York City. "But, when companies find themselves squeezed on both sides -- rising wages and demands to keep prices down -- there's a risk of recession and a deterioration in quality." Just because you pay incumbent workers higher wages, doesn't mean they're more highly skilled or have better training. It can just mean their wages are inflated. That's why simply paying people more isn't always the answer.

David Lewin, a professor of human resources at The Anderson School at UCLA in Westwood, California, believes the current shortage of workers will vanish by early in the next century as "people ... respond to the signals the marketplace is sending." Case in point: the wage gap between college-educated and high-school-educated workers has also served as a motivation for greater numbers of people to obtain a university education. The U.S. Department of Education found that college enrollment in two-year and four-year schools rose 17 percent between 1984 and 1994. Today, those with college degrees earn an average of $61,008, compared to $31,081 for workers with a high school diploma. Yet, that too has been a double-edged sword, as fewer young people learn skilled trades.

Clearly, getting skilled workers through training and education will be one of organizations' -- and our economy's -- best hopes for continued business success.

Training will be tied directly to organizational -- and economic -- growth.
Training isn't a new strategy, but it might be the savior of tomorrow's economic environment. Boeing, for example, is attempting to boost hiring by providing paid on-the-job training. Applicants who pass a written skills test and have some experience in a given field -- even if they haven't worked in aerospace before -- can receive three months' paid training and then decide whether they want to accept the job.

The company also is trying to sweeten the pot for existing workers by providing unlimited tuition reimbursement for any kind of education or training an employee desires, explains spokesperson Cindy Glickert. For example, with this new "Lifelong Learning" program, if an engineer decides to become a medical doctor, Boeing will pay for the schooling. The thought is that by allowing employees to engage in learning activities outside work, they'll get more into the continuous learning mode at work as well. Boeing has also beefed up its profit-sharing and stock-purchase programs. And it's offering workers flextime and telecommuting options. These types of add-ons can be a good strategy for an organization that finds training isn't incentive enough to entice workers.

In today's rocky "new deal" employment environment, most workers realize their employability depends on keeping their skills up to date. Training, for them, means survivability. Training also may help organizations of the future survive. Many companies are beginning to appreciate the economic value of training. The National Association of Manufacturers found that the average company spent 0.5 percent of its budget on incumbent worker training in 1991, a figure that now has risen to approximately 2 percent. What's more, companies aren't only spending to train managers and supervisors, they're allocating equal sums for line workers, Eisen says.

"Today, companies are hiring people without the necessary skills and training them on the job. They're waiting on the next graduating class and hiring teenagers right out of high school," explains Challenger. The problem is, while workers train, clients wait for their goods and services.

"Our customers are beating us up to improve deliveries because their revenue stream is being adversely affected by the delays," says Husta. "We have to train people, which means that, initially, performance and productivity suffer. To maintain a high level of quality on the outgoing product, we require more supervision at a higher cost. Our margins are being squeezed." To ease the squeeze, HR professionals will need to determine the exact skills their organizations will need in the future to be successful. This time, the skills gap isn't likely to disappear on its own.

Workforce planning will be key to boosting economic growth.
How does HR cultivate the necessary crop of workers to continue their organizations' own economic viability as well as help ensure America's foothold in the world economy? The answer may lie both in growing talent at home and accessing workers from abroad.

According to the Information Technology Association of America in Arlington, Virginia, 200,000 open positions exist in the information technology arena alone, and the semiconductor industry is short 40,000 workers. What's more, the end is nowhere in sight. The U.S. Labor Department estimates that computer-related jobs will soar 60 percent over the next decade. In real numbers, that translates into one million new technology jobs. Yet, according to current projections, the labor pool won't grow during the same period. And, while American universities have retained their position as the world leaders in education, 40 percent to 60 percent of all science students graduating from U.S. universities are now foreign born.

This fact has forced many firms to look beyond their own borders for help. There has been a growing dependence on foreign brain power to run U.S. corporations. Some companies have circumvented visa restrictions by shifting work abroad, and then using virtual work teams to manage projects from the United States.

Scores of other companies also are looking outside U.S. borders for workers. At the docks along the Gulf of Mexico, labor-strapped shipbuilders such as Service Marine Industries had begun hiring foreign nationals from India, Pakistan, Mexico, Scotland and other countries over the last few years. Then the Immigration and Naturalization Service ruled that an H-2B visa -- intended for short-term work in the United States -- couldn't be used for the ship construction and repair industry, in which a single project typically takes several months. Now, shipbuilders are scrambling to find replacements, and despite a training program directed at trade and secondary schools -- co-sponsored by the shipyards and the state of Louisiana -- it takes a year or more to fully train a student. "This looks to be a long-term problem with no easy or quick solution," states Husta.

There's a huge skills mismatch occurring as we move from an Industrial Age economy to an Information Age economy.

In fact, the demand for foreign workers has permeated almost every sector of the economy. Rhythm and Hues, for example, has 250 employees, about half of whom were born outside the United States. "Finding people with both the aesthetic and technical capabilities is becoming more difficult all the time," complains Hughes. "At some point, you learn not to make distinctions based on country of origin. You simply want the best people you can get."

The problem is also prevalent for organizations needing unskilled laborers. "As the unemployment rate falls, companies drop lower into the labor force [to find workers]," notes Salomon Smith Barney's Held. In central Florida, for example, The Walt Disney Co., Universal Studios and scores of other entertainment firms have transformed the region into one of the nation's hottest job markets. And hotels, such as the Orlando Hyatt, are searching for housekeepers as far away as Poland, Hungary and the Ukraine. The Orlando Hyatt also has begun to lure workers from Brownsville, Texas, where unemployment rates have hovered above 11 percent for the last several years.

These workforce problems will require human resources professionals to take a serious look at their workforce planning efforts. For help, we suggest you go to the online cover story at for some hands-on tools. Here are some other ideas to consider.

Other things HR can do to ensure future economic growth.
Whether the current state of labor indigestion works itself out remains to be seen. Regardless, many believe that corporations and government need to take action to avoid chronic problems. Kotkin and D'Amico argue that the nation's immigration laws are hopelessly outdated. "Immigration can be used as a way to attract workers on the high end of the skills ladder," D'Amico says. "In the United States, it's based almost entirely on family association." In 1997, the limit of 65,000 visas for skilled foreign workers was realized in early September, the earliest in decades. The number of applications has been rising at about 16 percent a year, making it look more like a lottery all the time.

Social Security policies are another potential fix. Current policies don't encourage people to work after retirement, because an individual is subject to tax penalties for working part time while collecting Social Security. "We need to find ways to reward people for contributing their knowledge and expertise. Older workers can provide a huge benefit to companies that require a more flexible labor force," D'Amico explains.

Some, like Challenger, believe government and businesses might need to create greater training and education incentives, in the form of tuition reimbursement or tax deductions. And Eisen argues that companies must become far more involved in their communities and local schools. "The products of their schools wind up in their factories," she says. "They can't afford to let themselves go under while they wait for society to reform the educational system."

To be sure, the labor shortage and the debate surrounding it aren't likely to disappear anytime soon. That might not be the news employers and HR professionals want to hear, but it's something they'll have to learn to cope with. "We can't change the birthrate; we can't change the educational system overnight," says Eisen. "But we must ensure that companies find skilled employees who can help drive the economy of the 21st century. Without them, America will fail to lead the world."

That's a long way from the lean and mean mentality of the early '90s, when workers were frequently cast aside like debris in the relentless quest to downsize and cut costs. If the unprecedented economic boom has taught corporate honchos one thing, it's that economic expansion and profits aren't predicated only on technological innovation, snappy new products and low costs. An educated and skilled workforce is the engine that drives the insatiable growth machine. Make sure you've planted the seeds for your own business' success.

Workforce, March 1998, Vol. 77, No. 3, pp. 44-54.

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