A Red Hot Labor Market? Don’t Believe It!

We’ve been seeing headlines screaming about low unemployment rates and a red hot job market.

I’m not seeing any of this.

The people I know still struggle along, looking for a decent job and taking any short term low wage job they can get. I’ve got a gig at a community college and don’t see any of my adjunct colleagues quitting the part time adjunct grind for jobs demanding graduate degrees and specialized knowledge — even though that is what they all have because it is required by the college.

An increase in the availability of good jobs would be reflected throughout the economy, but does not seem to be happening.

Historically, inflation increases when economies come out of recession and hiring picks up. That is because people are making more money and catching up on the buying they have deferred wile unemployed, creating demand.

But that’s not happening.

Inflation is edging up just a little, but that might because the Federal Reserve has been increasing interest rates just in case inflation increases.

If people were getting hired and making more money we would also expect a rise in home sales, but that isn’t happening. In fact just the opposite is happening. Since 2017 home sales have been sliding down and seem to be accelerating over the last six months or so.

We would also expect auto sales to increase, but nothing dramatic is happening there either, although there has been a slight uptick since August of 2018.

Real labor shortages also change the way employers hire.

When employers need workers they start lowering barriers to employment like credit and background checks, unrealistic demands for education and experience and start offering training programs.

Most significantly wages start increasing.

Although some of that is happening it isn’t what we could consider an economic trend.

The latest Employment Situation form the Bureau of Labor Statistics is not showing dramatic changes in any of its common measures of labor.

Long term unemployment, discouraged workers and those no longer in the labor force are all tracking steady. The only thing changing are the number of people who hold multiple jobs. That group has risen by about 25% since the beginning of 2014 and although progress has been jittery this seems to be a long term trend.

Quite possibly the rise in employment is mostly attributable to an increase in low paying part time jobs. This would explain the lack of impact in the rest of the economy that we would expect if well paying full time jobs were being filled. It also explains the increase in multiple job holders.

So, no, claims of a red hot job market are not supported by BLS statistics, the Federal Reserve or the National Association of Realtors.

Most likely this is just hype coming from people and organizations with an agenda who spread economic fantasies in hopes they will come true.

References

U.S. Bureau of Labor Statistics, Multiple Jobholders, Primary Job Full Time, Secondary Job Part Time [LNU02026625], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNU02026625, November 12, 2018. https://fred.stlouisfed.org/series/LNU02026625

National Association of Realtors, Existing Home Sales [EXHOSLUSM495S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/EXHOSLUSM495S, November 12, 2018. https://fred.stlouisfed.org/series/EXHOSLUSM495S

U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, New One Family Houses Sold: United States [HSN1F], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HSN1F, November 12, 2018. https://fred.stlouisfed.org/series/HSN1F

U.S. Bureau of Economic Analysis, Light Weight Vehicle Sales: Autos and Light Trucks [ALTSALES], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/ALTSALES, November 12, 2018. https://fred.stlouisfed.org/series/ALTSALES

Why, Exactly, Should We Pay You?

ObamaCare was watershed legislation for the health industry. The infusion of taxpayer money enriched companies and their executives almost beyond comprehension. When the median income of Americans was less than $30,000 annually many CEOs made more than that daily — before lunch!

To cite just one example, John Martin, made $863 million during the ObamaCare years as CEO of the pharmaceutical company Gilead Sciences.

Read the details here.

(I never know what to think about people who, in one breath, excoriate “greedy” pharmaceutical companies and in the next advocate government funding of health care.)

The rationale for these exorbitant pay scales is that aligning compensation with stock value incentivizes the CEO to focus on corporate financial health. That sounds good – tying compensation to the value of the company will keep the CEO focused on growth and productivity, but it simply doesn’t work.

For one thing, it encourages what Rana Foroohar calls “financialism” in her book Makers and Takers. Foroohar does a great job of making complex financial shenanigans understandable and explains how laying off employees or taking on debt benefits stock valuation, at least in the short run.

Leadership focusing on stock valuation often results in losing sight of the distinctive competencies that made the corporation successful. Companies fail to “stick to the knitting” and drift into banking, real estate and insurance ventures instead of their areas of long-term expertise. Read my recent blog Financialism leads to agony for GE and Sears for examples.

In his landmark book, Good to Great, Harvard business professor Jim Collins examined the role of CEOs in eleven companies that overcame challenges threatening their existence, yet survived to outperform the stock market for at least five years. He identified five CEO traits pivotal to the survival and success of these companies, naming them Level Five Leadership Traits:

  1. Humility cloaking hard edged resolve
  2. Ability to articulate threats and vision to win the support of an entire corporation
  3. Superior organizational skills. “Get the right people sitting in the right seats on the bus to success.”
  4. They are willing to join subordinates toiling in dull non-glamorous tasks.
  5. Contributions spring from talent, knowledge, skills and traditional work habits.

None of these sound like traits shared buy CEOs of Sears, General Electric or General Motors, all venerated American companies facing uncertain futures. To the contrary, the CEOs of each of these companies succumbed to the temptation of financialism and now find themselves managing a slow motion train wreck.

Collins gives examples of Level Five leaders turning away from lucrative stock options and instead taking on the arduous task of turning large companies away from disaster. Why do some CEOs chose this path, while others focus on running up the value of their company by any means possible, then cashing in stock options and leaving a mess for bankruptcy attorneys?

Adam Smith was a Scottish economist who established fundamental rules of economics in Wealth of Nations in 1776. Smith came up with the idea of Supply and Demand, stating that rational people work only in their own interests, but by doing so create an economy that benefits everyone. This is the concept of the famous “invisible hand”.

That might be fine for economists, but modern psychologists are challenging the notion of rational actors acting in their own interests. After all, sometimes people work very hard, but have no expectation of reward.

Why do we put effort, and sometimes a great deal of money, into hobbies? Why do we work for free and call it volunteering? Or donate to social causes that benefit people we will never meet?

These are questions the emerging field of behavioral economics addresses.

Pioneered by Daniel Kahneman and Amos Tversky in the 1970’s behavioral economics is now a field attracting social psychologists and neuropsychologists. Kahnemans’ thick tome Thinking Fast and Slow is a summary of his life’s work.

Dan Ariely is a social psychologist with an unshakable interest in exploring why we do things that do not generate rewards that should motivate us. His interest began when a former student visited him with an intriguing question.

The student had graduated and accepted a job with a prestigious investment bank and recently worked on a presentation his boss was to give on a merger and acquisition deal the bank was engaging in. The student worked very hard on the project for a number of weeks. He produced a beautiful presentation with engaging pictures, informative graphs and convincing text.

The boss was elated with the quality of the project and promised the young man a bonus for his efforts, but gently broke the news that the M&A deal was off and the presentation no longer needed.

The question the former student poised for Ariely was that even though he was compensated for the work, received a bonus and praise from the boss, he felt empty. Suddenly he didn’t care about the project he had worked so hard on. He realized he didn’t care much about the other things he was doing for the bank, either.

From a functional perspective, nothing had changed; he was still being well paid, the job gave him enviable social status, and the company paid even his laundry bill. The only thing that changed was that his work would not see the light of day. Why would this cause so much disappointment?

Many years ago, I was a behavior analyst working with intellectually disabled clients. At one point, I was asked to create a behavior plan for a client who was exhibiting sudden violent behaviors at his vocational setting. He had been in the vocational program for some time without incident, but lately would suddenly destroy property and assault staff for no apparent reason.

It took only a few minutes to see what the problem was.

The staff placed a large flat box in front of the client with dozens of little square compartments, each with a picture of a nut, bolt or washer, on the bottom of the compartment. This was a training device for the client to practice sorting parts. The client began pulling nuts, bolts and washers from a large coffee can, examining them closely and then searching for the compartment with a matching picture.

So far so good.

The client was slow and methodical, clearly being very conscientious about his work. However, he was a little too slow and the staff urged him on, making sure that he did not forget about the kitchen timer ticking away on a nearby shelf.

Soon the timer’s loud bell went off, and the client reluctantly leaned back so the staff could examine his work, making a few notes on a clipboard. Then, right in front of the client, she upended the box into a funnel and back into the coffee can. All the nuts and bolts the client so intently sorted were in the same place they were when he started sorting. Then she put the empty box in front of the client and reset the timer for the next trial.

And what do you suppose the client did?

He looked at the empty compartments incredulously, then at the staff. He shot to his feet, grabbed the box, lifted it over his head and smashed it onto the table. Then he went after the staff.

The client had the same experience as Ariely’s former student. Both had worked hard only to see their efforts summarily erased. In both cases compensation was not an issue, and the actions of others was devastating.

Ariely and his colleagues investigated this question at length in dozens of ingenuous experiments documented in Arielys book, The Upside of Irrationality.

One of the first things Ariely found out was that when a task is simple and physical incentives worked well to increase performance. However, when a task was even minimally cognitive higher incentives led to lower performance.

Ariely concluded that higher incentives became a distraction when cognitive tasks are involved. Students often have much higher scores when taking practice SAT tests compared to actual SAT tests, for example. We call it “choking” – when the pressure to perform well undermines our ability to do so.

These results are not exactly earthshattering, but they led Ariely to think about the nature of work. Why do we volunteer or work hard at hobbies that don’t have incentives associated with them? Is there some sort of natural incentive that rewards us for working?

Back in the 60’s animal studies found that rats trained to press a lever for food would continue to press the lever occasionally even when food was freely available. Researchers found that 44% of rats would manually deliver more than half their daily food intake.

Subsequent experiments found this was common in all sorts of animals. Why would an animal prefer to exert effort to get food rather than just allow it to be delivered? Is there something inherently rewarding about work?

It seems there is.

In his book Satisfaction: Sensation Seeking, Novelty, and the Science of Finding True Fulfillment, Gregory Berns tells about an fMRI experiment by researcher Cary Zink.

Zink instructed volunteers press a button when particular shapes appeared on a computer screen. During the trial, a dollar bill would materialize on the screen. In one condition, the dollar was automatically deposited into a virtual bank, and in another, the volunteer had to push a button to make the deposit.

As the subjects were performing these tasks, their striatums were monitored. The striatum is a small structure at the base of the brain associated with the reward system. When the striatum is active, we are pleased.

The interesting thing about Zink’s experiment was that when the subjects were required to press a button to deposit their money their striatum indicated more pleasure. In the Spartan context of the experiment, this constitutes work. Zink concluded that doing something – working – in order to receive a reward was more satisfying than passively accepting a reward.

Much like the animal experiments, Zink’s research suggests that humans experience happiness when earning rewards rather than being given them.

Berns found out something else about the striatum in his experiments on motivation. It reacts to novel information. We feel a sense of pleasure when we run across new things we have not experienced before. No only does the striatum reward us for making an effort, it also reacts to the results of that effort – something new and different from before.

This implies that we are inherently motivated not only to explore novel experiences, but to create them as well. The reward of work is not just the money we receive, but the experience of work as well. That is why we forgo pay to volunteer and spend money on hobbies.

So what is going on with our highly compensated CEOs?

Two things.

First, when compensation is tied to corporate stock value CEOs are detracted from the  distinctive competencies that have driven past successes, and focus instead on stock price. This encourages financialism, which is often the death knell of a company.

The other thing that happens is that like most other animals and humans, the CEO has a drive to change the world in some way. Given the size of his or her compensation, big changes are expected.

By tying large compensation to stock price, Boards are not only distracting the CEO from “tending the knitting”, but also priming them to make these distracted changes in a big way.

It is doubtful we will see any reforms to corporate compensation in the near future, but talking about what needs to happen will make that day come just a little sooner.

 

Books used in this article:

Ariely, D. (2010). The upside of irrationality: The unexpected benefits of defying logic at work and at home. New York: Harper.

Berns, G. (2005). Satisfaction: Sensation Seeking, Novelty, and the Science of Finding True Fulfillment (1st ed.). New York: Henry Holt.

Collins, J. C. (2001). Good to great: Why some companies make the leap–and others don’t (1st ed.). New York, NY: HarperBusiness

Foroohar, R. (2016). Makers and takers: The rise of finance and the fall of American business (First edition. ed.). New York: Crown Business.

Kahneman, D. (2011). Thinking, fast and slow (1st ed.). New York: Farrar, Straus and Giroux.

Smith, A. (2015). The wealth of nations. New York: Fall River Press.

 

 

 

Degree Inflation, Credentialing and Signaling: Employers Now Demand Over Qualification

A new report out today from the Philadelphia Federal Reserve examines the recent trend of employers inflating requirements for jobs. “Addressing Bias and Equity in Hiring” is a literature review by Ashley Putnam, director of Economic Growth and Mobility Project at the Philadelphia Federal Reserve. Literature reviews are a way for scientists to condense current knowledge on particular topic. Putnam didn’t do any original research; instead, she summarizes previous work on the topic.

“Upcredentialing” usually means demanding a college degree for jobs that do not require one. It’s expensive for both job seekers and employers, but the sort term gain is a powerful seduction for employers.

Economists measure upcredentialing by comparing education levels of people currently in a particular job with education levels required in job postings. For example, Putnam cites a 2014 study in which 64% of job posts for executive assistants required a college degree, but only 19% of executive assistants on the job at the time had one.

President Obama gave his first inauguration speech in the mist of the collapse of the industrial economy in 2008. In it, he urged Americans to go to school in order to be ready for the eventual recovery.

That recovery never came, of course. Instead, we find ourselves in a decade’s long project of building a new economy with little resemblance to the previous one. While the 3.8% unemployment rate is wall papered all over the media, the Bureau of Labor Statistics, (BLS), reports that record numbers of people are not in the workforce, the average workweek is only 33 hours and wages continue to stagnate.

The Great Recession was a boom time for the education industry. Admissions shot up by about 30% and there was a bumper crop of college graduates during President Obamas first term.

Unfortunately, the jobs of the 20th century no longer exist for these new graduates.

Katz and Krueger (2017) estimated that 94% of the jobs created between 2005 and 2015 were contingent jobs – “gigs” that generally do not pay a living wage. The National Employment Law Project finds that 60% of newly created jobs are low wage, low skill service positions. These are not the jobs that people responding to President Obamas call for education had in mind.

Old-fashioned jobs that legitimately required skills that a bachelor’s degree conferred have been in short supply, while at the same time the United States has a higher proportion of bachelor degree holders than ever before. About one third of Americans have a bachelor’s degree, and more than half have a two-year degree or certificate.

In spite of record numbers of Americans holding bachelor and technical degrees, employers complain of a “skills gap”. Potential employees do not have the technical skills needed in the workplace.

Peter Cappelli has studied this issue at length in his book, Why Good People Can’t Get Jobs, and finds a number of reasons the “skills gap” is largely a myth. Cappelli points out that many of the skills employers have trouble finding are not the kind learned in a bachelors program. As surprising as it might be, most colleges and universities do not have basic computer skills as a general education requirement.

Often employers look for specialized skills; say the ability to code in Python, or WordPress experience. These skills are mostly self-taught, and consequently have no certificate associated with them.

Another trend among employers is to condense several technical jobs into one position. Cappelli gives the example of an engineer with thirty years’ experience, a master’s degree and a Professional Engineer certificate who could not get a position with an engineering firm because he could not type 65 words per minute.

“David Altig, research director at the Federal Reserve Bank of Atlanta, notes that this broadening of skill requirements is now commonplace. Where in the past a company may have had three positions and only one required computer skills, now ‘one person is doing all three of those jobs—and every job you fill has to have computer skills,’”  (Cappelli, 2013, Kindle Locations 553-555).

Another under the radar development has been the success with which American companies have shifted the expense of education to employees. Like retirement and health care, employees are now largely responsible for financing their education. Education costs are one of the fringe benefits that disappeared with the industrial economy.

On the job training, apprenticeships and learning how to do a new job are outdated. We are now in an era of “onboarding” new employees with the expectation that they must be productive from day one on the job.

Both Putnam and Cappelli point to the bachelor’s degree as a “signaling” device. It may not confer specific technical skills needed to perform a job, but implies the holder has certain characteristics. Employers can infer race, social class and cultural values by a bachelor’s degree and not be concerned with charges of racism or elitism.

Academic studies on the relationship between bachelor degree holders and productivity have been inconclusive. However, recent studies show that “upcredentialing” and using education as a signaling device cost employers a good deal of money.

Adding unnecessary requirements makes it more difficult and time consuming to find candidates whose knowledge, skills and abilities, (KSAs), meet the inflated requirements of employers. Putnam cites sties a study indicating that IT help desk positons requiring a college degree take 40% more time to fill than the same position without the college requirement. Front line construction mangers require 119% more time to fill a vacancy with a bachelor’s degree is required

This translates into huge amounts of money. The Centre for Economic Research estimates that unfilled openings cost the economy $160 billion a year. Degree inflation also increases employee turnover. While one might argue that college graduates deserve a pay differential compared to non-grads, Harvard Business School contends that non-degree holders perform just as well on specific technical needs for particular jobs. Adding a requirement for a degree adds costs but does not seem to have a matching effect on productivity or quality of work.

Entry-level employees bear a disproportionate cost of upcredentialing. According to Putnam, costs at four-year institutions increased by 129% between 1987 and 2017 – far more than wages for degree holders, which have stagnated.

But not everyone who enters college completes it — only a few more than half of students who enter college actually graduate. The remainder has no degree, but carries student debt. The most common reason for dropping out of college is to keep a job; the second most common reasons are lack of affordability of higher education.

None of this will change any time soon. The glut of degree holders will remain as long as the economy does not expand enough to provide jobs for people who have left the labor force.

 

References used in this article:

Cappelli, P. (2013). Why good people can’t get jobs: The skills gap and what companies can do about it. (Kindle ed.). Philadelphia: Wharton Digital Press.

Fuller, J. B., & Raman, M. (2017). Dismissed by Degrees: How Degree Inflation is Undermining US Competitiveness and Hurting America’s Middle Class. Accenture, Grads of Life, Harvard Business School.

Katz, L. F. & Krueger, A. B. (2017). The rise and nature of alternative work arrangements in the United States, 1995–2015 (2016). The Global Talent Competitiveness Index, 2016.

National Employment Law Project, “The Low-Wage Recovery and Growing Inequality”, August 2012, available at http://www.nelp.org/content/uploads/2015/03/LowWageRecovery2012.pdf.

Putnam, A. (Spring 2018). Addressing Bias and Equity in Hiring. Federal Reserve Bank of Philadelphia, Economic Insights, Cascade, 1(98), 9