To the “Three R’s” Add One More: Writhing

Companies will feel ever more pain as the shortage of technically skilled workers intensifies.
David McCannMarch 1, 2011

It may rank as the most curious dichotomy wrought by the recession: at a time when millions of people remain unemployed, many companies are having a hard time filling key open positions. What gives?

Call it the technical-skills gap. With businesses increasingly turning to more-sophisticated automation to drive efficiencies (and, eventually, scale up), many are worried that they won’t be able to find enough technically skilled workers over the next decade. The shortage is already being felt in manufacturing, utilities, energy, health care, and other industries that are growing more dependent on skilled labor. But almost any company is a candidate to feel the pinch as the demand for skilled IT workers, researchers, and other positions outstrips the supply.

With the economy only beginning to pick up steam, this may seem like a minor headache, but in fact the ramifications could be enormous. When a company can’t hire enough qualified workers, it may risk a loss of production, or it may have to resort to a mix of expensive strategies like paying more overtime, hiring people at higher wages, or calling in consultants.

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In a recent survey by AC Nielsen on behalf of Advanced Technology Services (ATS), a provider of outsourced factory maintenance, more than two-thirds of responding companies said they expect the looming talent shortage to cost them at least $50 million. And one-third of those with revenues of more than $1 billion indicated the hit would top $100 million.

The trend is already apparent in recent data from the Bureau of Labor Statistics. In manufacturing, for example, the seasonally adjusted number of job openings swelled by 45% between October 2009 and October 2010. But the number of actual hires rose by only 11%. That’s no anomaly: a similar pattern was present for every month of the year.

The shortage of technically skilled workers is not new — it was first identified in the early 1990s — but many interested observers expect it to worsen dramatically over the next few years, because of two converging factors. One is that few students today are pursuing technically oriented career paths, a development that is not without irony. “Our young people do love technology,” says Edward Gordon, an author and former college professor who consults with companies on workforce issues, particularly concerning the skilled-labor shortage. “But they don’t want to design, manufacture, repair, or manage it. They consider those jobs inferior and socially uncool.”

That perception is reinforced by attitudes among guidance counselors and parents, says ATS president Jeff Owens. A recent study by the Organization for Economic Cooperation and Development found that fewer than 10% of American teens plan to pursue skilled-trade careers.

The other factor is that the big wave of baby-boomer retirements, while perhaps delayed by the economic downturn, will nonetheless be upon us soon. That is a particular problem for manufacturers and utilities, where it is not uncommon for the median age of skilled workers to be between 50 and 60, or beyond.

What to Do?
Research by Gordon, who has written two books on the topic, led him to estimate that by 2020 there will be 123 million high-skill, high-pay jobs available in the United States, but only 50 million Americans with the right education to fill them. U.S. companies are already turning to other countries to supplement the local talent, and almost surely they will be doing more of that in the next few years.

CFOs are, at the least, wary. MI Windows and Doors has been fortunate so far in that its factory force is composed mostly of lower-skilled workers who assemble premanufactured parts. But, says CFO Don Doherty, as the company grows it will increasingly rely on higher levels of automation and the people who can maintain it. “I would say that within two or three years, we’re going to be looking hard at our technology, and we likely will come into contact with the skilled-labor shortage.”

On even higher alert is Brian Tierney, CFO of American Electric Power. He wants to avoid a repeat of the company’s difficulty in finding enough qualified workers to conduct a major 2007 environmental “retrofit” project, when it had up to 8,500 contractors on its properties. The Environmental Protection Agency has proposed a series of sweeping reforms — addressing hazardous air pollutants, coal-combustion residuals, and mercury regulations, among others — that are currently envisioned for implementation by 2015.

“If all those EPA initiatives were to come to fruition in a short time-frame, I think we’d be right back to a shortage of skilled labor and engineers,” Tierney says. “It may exceed our ability to get the work done on time.”

What does this mean for CFOs? First and foremost, they can provide the cost-benefit analysis needed to determine just how severe such labor shortages are, and how best to proceed. Joe Evans, CFO of Chaparral Energy, an oil-and-gas exploration-and-production company, frames the issue not in terms of an absolute shortage, but in terms of wages. The company employs large numbers of engineers, geologists, and geophysicists, and while Evans acknowledges that they are in shorter supply than he would like during boom periods for his volatile industry, that doesn’t mean they can’t be found. What it does mean, he says, is that “those kinds of people can get many offers, so our compensation costs go up.”

That’s the kind of thinking that Peter Cappelli, a professor at the University of Pennsylvania’s Wharton School, would like to see more of. “The people who are making arguments about the skilled-labor ‘shortage’ are not thinking about this issue carefully,” he says. “Many people don’t understand that labor markets are like other markets: they adjust.” In other words, raising wages brings more people into a profession.

Why, he asks, did the utilities industry not suffer a shortage of linemen in the 1950s and ’60s, when unemployment was lower and people were scarcer? Because those jobs paid better then than they do now, on an adjusted basis. Most employers that can’t find the workers they need haven’t even tried raising wages, he says, much less launch the training and apprenticeship programs that were common decades ago.

Money Isn’t Everything
Sounds like Econ 101 on paper, but in the real world it may not be so simple. To begin with, who wants to be the first to raise the wage in an industry or region? “Once it starts, it becomes the bar for everyone, and that’s a tough position to be in,” says Doherty of MI Windows and Doors.

American Electric Power’s Tierney adds that success can hinge on factors other than pay. For example, his company plans to open a new facility near Hope, Arkansas, in 2012. To make sure it has a sufficient talent pool, the company has partnered with a local community college on a training program it hopes will provide half of the 110 skilled workers it anticipates needing.

And, says Saul Basch, CFO of HSB Group, an insurer and quality-assurance provider that employs 1,200 engineers, “it’s not like 100% of the population has the aptitude for this kind of work. The number of smart-enough people to choose from is constrained.”

And many jobs once considered blue-collar are acquiring a white-collar dimension. “Transitioning from physical jobs to knowledge jobs is a major trend in manufacturing,” says Jeff Schwartz, a human-capital consultant with Deloitte & Touche. He gives the example of a midwestern state that recently tried to hire welders to work on wind-energy turbines. It was able to find workers who knew how to weld, and others who knew how to read technical blueprints, but very few who could do both.

Gordon laments a general societal decline in reading that he says is contributing heavily to the problem. “Instead, they’re doing cool stuff like tweeting and IM-ing. Well, guess what? They’re not learning much,” he says.

Gordon adds that many workers need to unlearn something: the idea that a high-school diploma can land them a well-paying job. “They’re wrong,” says Gordon. “Those days are over.”

David McCann is senior editor for human capital and careers at CFO.



Investing in Training
The Case for an Accounting-Rule Change

Author and workforce consultant Edward Gordon has what he thinks could be at least a partial solution to the lack of skilled workers, and he hopes the Financial Accounting Standards Board will listen up.

Gordon is calling on FASB to change accounting rules so that companies can capitalize employee training and education costs, as they do now for newly built plants and new equipment. “These are long-term investments that companies aren’t motivated to make, because of the big hit on earnings that they’ll take in the short term,” he opines.

Current U.S. accounting standards were largely written for a 20th-century mass-production economy that changed slowly and in which unskilled and semiskilled jobs predominated. American businesses need a new financial metric that appears as an investment on a balance sheet in order to help them keep up with the need to enlarge the talent pool and keep workers’ skills up to date, says Gordon.

For tax purposes, the Internal Revenue Service already allows companies to capitalize the purchase price, setup charges, and training costs for new equipment on which employees need to be trained. But a company buying, say, a new computer system may incur costs for training the system’s operators that aren’t necessarily covered under IRS rules, such as for advanced verbal and math education, team building, and interpersonal skills.

IRS Ruling 96-62 states, “Training costs may be capitalized only in the unusual circumstances where training is intended primarily to obtain future benefits significantly beyond those traditionally associated with training provided in ordinary course of the taxpayer’s trade or business.” Whether that would encompass the above-mentioned ancillary costs is on the murky side.

Tax rules aside, if FASB made the change, it wouldn’t solve the whole problem, Gordon says, but it would alleviate one portion of what he identifies as a systemic failure. He suggests that if FASB does not act, Congress should legislate the ability to capitalize training and education costs on balance sheets. — D.M.