B School for Public Policy

Peter Cappelli, Director of the Center for Human Resources and Professor of Management at the Wharton School and Host of I...

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US Workforce Development and Employer Tax Incentive Plans

There has been much talk recently about a skills gap in the United States. Even though unemployment is in the low 4% territory, there are still many jobs that companies seemingly can’t fill because the people applying for them may not have the skills necessary. But it raises an interesting question: Who is actually responsible for taking care of that gap? Peter Cappelli, Director of the Center for Human Resources and Professor of Management at the Wharton School and Host of In the Workplace, joins host Dan Loney on Knowledge@Wharton.

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An edited transcript of the conversation follows.

Knowledge@Wharton:  We have talked on several occasions about the skills gap we see here in the United States. Even though unemployment is in the low 4% territory, there are still many jobs that companies seemingly can’t fill because the people applying for them may not have the skills necessary. But it raises an interesting question: Who is actually responsible for taking care of that gap? Wharton Professor Peter Cappelli recently did a seminar here on campus about workforce development, tax incentive plans, and more, and he joins us to discuss this topic. You can also hear Peter every Thursday from 5:00 to 7:00 p.m. as the co-host of In the Workplace right here on SiriusXM 111. Good to see you, sir.

Cappelli:  Thank you, Dan. Nice to be here.

Knowledge@Wharton:  So I’ll just throw the big, massive question right out at the top. Who’s responsible?

Cappelli:  Well, can we back up one and ask a more massive question? That is: what is this thing we’re talking about, about a skills gap, anyway? What does that mean? And I think this is one of these topics that has gotten confusing. It’s not complicated, but it’s confusing because so many people talk about it. They never define what they’re talking about, and so they use the term in really different ways.

Knowledge@Wharton:  Okay.

Cappelli:  So there are at least three different ways in which this term gets used, but the consequences are really quite different. The way it usually was used in the U.S. up until maybe the last month or two [referred to] the idea that there was something systematically wrong with the U.S. workplace and the workers in the workplace. You often heard this story: schools are failing, and so kids graduating from school aren’t capable of getting jobs and are lacking in some ways the skills that employers want. So that’s usually what people meant by the idea of “skills gap.”

There’s actually nothing to that argument. It’s just not true. The kids today, in terms of academic skills, things you learn in school, are at least as good as the kids who graduated a little while ago and significantly better than the kids who graduated when I graduated from high school. There’s been kind of slow but reasonably steady progress in academic achievement of kids leaving high school. But the other problem with that argument is very few employers are actually trying to hire kids out of high school, anyway. So that was never really much of a story. 

The second way it gets used is the idea that there is some big mismatch going on, that there are people who have skills, but they don’t fit the jobs anymore, and you need these new skills over here. That doesn’t seem to be true, either. That story was kind of coming out of the Great Recession, you know, the economy changed.

Knowledge@Wharton:  Sure.

Cappelli:  It turns out that’s not true, either. The economy coming out looked almost identical to the economy going in. It’s not that one industry is booming and others have declined…So the idea that there are parts of the country where there are tons of surplus skills and other [parts] where they need them, that doesn’t seem to be true, either.

So what is it we’re actually talking about?  I think what we’re actually talking about, to be honest, is that there are a lot of pundits and some consulting firms that have created kind of a fake story. And the fake story is the notion that employers can’t find people to do jobs.

Knowledge@Wharton:  Okay.

Cappelli:  There is one situation where I believe that is true. There’s one thing worth talking about there, maybe two things worth talking about. The first is drug testing. And drug testing is something which is relatively new historically. We didn’t really see very much of this before 2000 or so. There were some jobs that you were required to test people on: airline pilots, train engineers…

Knowledge@Wharton:  Bus drivers, I think, too.

Cappelli:  Yes, I think bus drivers. If you’re basically handling something big where you could really hurt a lot of people–

Knowledge@Wharton:  With a lot of people on there, yes.

Cappelli:  Right. Which doesn’t count anything in radio, right?

Knowledge@Wharton:  Right. We are safe in that.

Cappelli:  We’re safe on that one. So those folks had to be drug tested. But then during the Great Recession in particular, [drug testing] started to expand and expand and expand. Then companies were doing it all the time for almost all jobs, including retail jobs, where you wouldn’t have thought that there was that problem of doing something that could really hurt people.

The economy is certainly getting stronger, slowly, not enormously fast, but slowly getting better for years now, and [so is] the unemployment rate, which is a tricky measure, because it only measures the people who are continuing to look for jobs. So if you’ve dropped out [of the workforce], you’re not counted as unemployed. One of the reasons why the economy can keep growing and we can add more jobs by the way, here’s the magic number:  140,000 jobs each month. We’ve got to add that many [jobs], or we’re not keeping up with [the] growth of the population.

So if you hear these numbers where this month it’s 110,000 [jobs added], we’re actually falling behind there. But we’ve been above that–roughly 200,000. So the economy is growing. The supply of unemployed workers has shrunk considerably, and the supply of workers who have given up but are starting to come back in is going down, but there is still a fair number of those folks.

So if you are an employer who is trying to hire retail people - and that’s where a big chunk of the jobs are, in Walmart, fast food, stuff like that - and you are now giving people drug tests, but the population from which you’re drawing is shrinking down, and people are getting better jobs someplace else, the pool you’re left with is pretty small. So you could raise your wages, but that’s been the sticking point, right? Wages are not going up. So for people who think we really haven’t hit a really tight labor market yet, that’s the best piece of evidence, that you would think if there really is a shortage of something, prices rise. That’s how markets work. But prices are not rising for labor. So that, at least across the economy, is a little hard to square with this notion that we’ve got all these jobs we can’t fill.

One other point on that, and that is pundits have discovered vacancy rates. And when they say there are jobs that are vacant, [well] there are always jobs vacant. And the reason they’re vacant is [if] somebody quits today [and] you try to fill their job, you’ve got to get permission. Then you post it, then you interview people. And it’s typically three or four months before you fill it. You could have no trouble filling those jobs whatsoever, and it will show up as a vacancy in a snapshot. So there are always vacancies. And the new claim you hear is there are more vacancies now that there have ever been. Well, of course. The labor force is bigger. The number of jobs is more. The economy is bigger. Every year there will be more vacancies than there ever have been. It doesn’t prove anything, right?

But let’s go back to drug testing, which I think is an issue. In some states, you’ve got this situation where marijuana use, for example, is legal, right?

Knowledge@Wharton:  Sure, yes.

Cappelli:  And many companies there, in those states, still test people for marijuana, and they won’t hire them if they fail those tests – which is not the same as saying, “We’ll fire people who are impaired.” I think everybody recognizes that’s reasonable, or if they’re under the influence, but firing people or not hiring people who don’t pass those [tests] – that is, [tests] show up that [marijuana] has been in their blood at some point – starts to narrow your workforce that you could draw from. And in some places, [by] quite a lot.

So I think as the economy continues to tighten, one of the interesting challenges for those companies is going to be: do we raise our wages? [This] is how you will be able to attract the pool you want. Or do you say, “We’re going to change our standards, and we’re trying to get less picky about who we hire.” Now historically this has always happened. They’ve gotten less picky, and that’s probably what will start happening here.

Knowledge@Wharton:  Is there possibility, though, that there will be a shift of mindset on that? Because as you kind of alluded to, the last thing I think companies like to do is raise the wages.

Cappelli:  Yes, yes.

Knowledge@Wharton:  That’s kind of the last alternative.

Cappelli:  Well, I think this goes back to the question you asked at the very beginning, which we’ll get to shortly. We do need certain vocational skills that are always important – electricians for example, or skilled trades, or machine kind of work, that sort of stuff. There are some entry-level skills. Who ends up paying for that? And if it comes to employers, they’ve got a choice of [either] lessening their standards on things like drug testing and having to hire people and train them, or raising the wages. It’s going to start costing them a lot of money to have these high drug standards, [so] maybe they’ll start to weaken them - particularly in those states where they’ve already said that recreational use of these drugs is legal. It seems a little strange to continue that.

Knowledge@Wharton:  Yes, and for some companies that have a variety of locations across the U.S., they have a standard, let’s say, in one state that does not have legal marijuana, where they may have an office or warehouse or whatever in Washington state or Colorado that does have legal marijuana.

Cappelli:  Right.

Knowledge@Wharton:  You know, you’re kind of working a back and forth here.

Cappelli:  Yes. And you’ve got to have some sympathy for big employers in the U.S., because it’s like fifty different countries, and it’s getting even more extreme. On the other hand, you do have to ask yourself, if you’re a retail company, why do you need the same policy for your employees in Texas as you have in Washington state? You’re not moving people back and forth between, and what’s the problem there?

Knowledge@Wharton:  Right.

Cappelli:  So I think what’s interesting about this question we asked at the very beginning -  a skill gap, what does it mean? The extent that there’s truth to it, it is simply this: it is getting harder for employers to hire who they want.

Now the reason it’s getting harder is some of this is what we used to call “the tyranny of small numbers.” That is, if you start out in a situation where we were after the Great Recession where you had people lined up outside your doors, you could hire over-qualified people for pennies.

They are hiring managers now who are in their 30s, and all they have known is that labor market. And that’s changing.

And they’re saying, “Hey, we didn’t do anything. Something’s really wrong.” Well, it’s not that anything’s really wrong, it’s just that the economy is going back to something normal, and your expectations are out of whack, because they’ve been set in this period which itself was extraordinary. So that’s part of, I think, what is going on. There will have to be some readjustment on the part of the expectation of employers. It’s not going to be like it was in 2010 or 2011. That’s one thing.

I think that drug testing is one aspect of that. I think there is one other public policy issue which is worth talking about. And that is that there are lots of programs to support people who are unemployed or people who are disadvantaged.

Knowledge@Wharton:  Right.

Cappelli: Many of those programs that provide some assistance, even if you get a job, but you usually lose that assistance if you’re working full-time. 20 hours is usually the breakpoint for a lot of these things: childcare, in some states Medicaid and things like that. And at 20 hours, if you lose your eligibility, if you work 21, you’re way worse off. I would call this a kind of cliff that you fall off. And that’s a little quirky, because what it means is there are lots of folks who won’t work full-time because of that, or won’t even go from 20 to 30 hours because of that. And that’s a public policy thing we ought to think about.

I think back to the first question you asked, which was back to this who’s responsible for skills? Okay, let’s think about a normal situation. Assume the economy is normal. We’ve got a bunch of jobs that have to be filled. Healthcare–you need some skills there. Manufacturing–you need skills there. And then there’s all the craft work–electricians, carpenters, that sort of stuff. You need skills there. And you probably need them before you can actually be useful at all doing the job. Who’s responsible for those skills? Who’s responsible for paying for them?

And some people would say, and this was the historical model, that the schools are responsible for education. And that means we’re responsible for preparing you with the basic academic skills, and maybe some interpersonal skills and other things, so that you could then go to an employer and get trained. So it’s the employers who were responsible for that, or, in the older days, unions and companies together, with apprenticeship program for electricians and those sorts of folks. Apprenticeship programs, by the way, work in a very interesting way. You’re paying for this as you go, because the value of the training you get is pretty high, and so they don’t have to pay you very much while you’re doing it, and you’re contributing something.

Knowledge@Wharton:  Sure.

Cappelli:  You’re learning by doing. Apprenticeship programs have collapsed, [and] the largest reason is because the unions collapsed. So all those skilled trade [programs] have really shrunk. That’s the first problem. And the second problem is employers no longer seem very interested in training people. Everybody wants to hire somebody with five years experience.

Knowledge@Wharton:  Right.

Cappelli:  So something’s got to give here, right? You can no longer just expect, as the economy continues to tighten, that you’ll just be able to hire somebody who has already got these skills, or hire from your competitors next door without having to either raise a lot of wages or do something else. And maybe that something else is to train people, or maybe it is to set up an apprenticeship program or something like that.

So the extent to which there is a moment where there’s something new, that’s it right now, because a lot of the arrangements we had before have collapsed.

Knowledge@Wharton:  So then how does it change the potential relationship between the college, university, or high school and the business if you don’t necessarily have the apprentice program being a kind of a key component of that transition period?

Cappelli: That is a great point, and it’s a real problem, and there’s a third issue here. Employers have stopped training so much, union apprenticeship programs have largely collapsed, and the third thing is that vocational education in the U.S. over the last generation has changed dramatically – there’s just a whole lot less of it. So in high school, the idea that you could go into the shop class, which is what happened when we were in school, [and participate in] vocational education where you could learn to be a carpenter in high school. Those [classes] have gone away, and I think they went away because of concern from the political left. The concern was [that] everybody would be better off with a college degree, we are tracking these kids and writing them off at age 14 if we send them to vocational education. So we got rid of those.

The three areas where we used to provide opportunities for people to get hands-on skills in particular have all declined. So, what do we do now? And, as you say, one of the answers is the post-secondary schools have raised their hands, and they’ve said, “Oh, we’ll handle this for you.” The for-profit education sector is almost completely focused on this segment, right? We will get you a job after high school, if you come to us and get certificates or training or even a degree in something practical.

Knowledge@Wharton:  Which hasn’t played out necessarily in every case with some of these institutions – a couple of them have gone under in the last few years.

Cappelli:  Yes, lots of scandals, right? And the reason that this is a public policy issue is because a lot of those scandals involved government loans. So you’re borrowing money to go to these places, and then they don’t get you a job or you don’t finish or something goes wrong, you’ve still got these government loans. And the government is effectively subsidizing at least part of those systems.

The other place which hasn’t really raised its hand but has been forced into this situation is community colleges, which everybody recognizes has to be kind of the solution to a lot of this. The problem is, community colleges are funded local community by local community. Most of them - those states and local communities – [have seen decreased] tax revenues. The support for these schools has really shrunk, but the need [for them] has gone through the roof.

I remember, maybe even ten years ago, the figure then–before the Great Recession–was that about a quarter of the individuals in community colleges already had four-year college degrees.

Knowledge@Wharton:  Wow.

Cappelli:  They were going back to community colleges to get job skills. And then you’ve got all these high school kids who are coming into community colleges, and they’re looking for job skills. But do you know the most common major in community colleges?

Knowledge@Wharton:  No.

Cappelli:  Liberal arts.

Knowledge@Wharton:  Which has its own issues in society right now, as well.

Cappelli:  Right. And the reason it’s liberal arts is community colleges have had this other mission, as well, and that was to provide an inexpensive way and sometimes a second chance way for kids to get into four-year colleges. And some state university systems made that pretty explicit. If you go to the community college and you do well, we’ll take you into the four-year program afterwards.

So the poor community colleges are supposed to be doing that. They’re supposed to be providing job training for people who come back in after education, four years. And they’re also supposed to now be providing the kinds of things you used to do in vocational education. The difference now is–as opposed to vocational education–you have to pay for it.

Knowledge@Wharton:  Yes.

Cappelli:  So even though tuition isn’t that high, if you don’t have a lot of money, that’s a burden, right? So we’ve got a bit of a conundrum here as to how we’re going to make this happen.

Knowledge@Wharton:  What’s the simplest way of doing that? You can’t juggle fifteen things at once, and probably a lot of these community colleges, the last thing they figured ten years ago that they would be doing is teaching kids vocational elements, so that they can be a mechanic or a carpenter or something like that.

Cappelli:  Well, I think you put your finger on one of the problems, and that is it’s really tough to become a plumber in a classroom.

Knowledge@Wharton:  That’s true, absolutely. Yes.

Cappelli:  And it’s true for most of these skilled trades. It’s really hard to do.

Knowledge@Wharton:  Not even very hard–impossible.

Cappelli:  Almost impossible, right? Here’s a picture of a toilet–it’s not quite the same, you know.

Knowledge@Wharton:  Maybe if we get to artificial intelligence, then we’ll add that element to it.

Cappelli:  There you go. So I think it is almost impossible to crack this problem without engagement from employers. And the question is: How are we going to get them to do it?

Now some people will say that if we just wait, they’ll come back in, because it’ll get hard enough to hire. They’ll figure it out, and they’ll come back in. I think there are a couple of reasons why that might be a little optimistic. One is that a great many companies got rid of their training programs all together. It’s not just that they scaled them down, and you could quickly scale them back up. And a lot of the companies that have started since never did training, so for them to start up a program of training people is a pretty big investment. And I don’t think anybody wants to be the first one in on that, partly because their fear, which is sort of justifiable, is that if we suddenly start training people in this community, we’re going to lose them, because all the competitors around us will just wait until we finish training them, and then bam, they’ll hire them away from us, which is probably true. I imagine that will happen. So, I think this is a problem where we need the employers back into this game.

On the other hand, it’s going to be pretty difficult for them to do it by themselves. And the other problem we’ve got is that training in the U.S. is really an education – a state-by-state and often local-by-local – phenomenon. And so talking about federal policy and education and federal policy and training doesn’t mean all that much, because all of the action has been at the state and local levels.

Knowledge@Wharton:  And it comes at a time where a lot of the states aren’t funding their schools the way that they did ten to fifteen years ago.

Cappelli:  Right, sure–and especially community colleges.

Knowledge@Wharton:  Thanks for coming in. I greatly appreciate it.

Cappelli:  We left you with a problem.

Knowledge@Wharton:  And it’s a problem that’s not going away, unfortunately, any time soon