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Confronting the U.S. Advanced Manufacturing Skills Gap

Monday, January 28, 2013

We have a skills gap and it’s going to get worse. Here’s what we can do about it.

It is generally acknowledged that there is a shortage of skilled manufacturing workers in the United States, but estimates of the size of the shortage vary widely. At a time when unemployment in the United States remains stubbornly high, and while the U.S. manufacturing sector may be in the early stages of a renaissance, having a shortage of skilled workers is a serious challenge that needs to be addressed.

In October 2012, the Boston Consulting Group (BCG) released a study, “Made in America, Again: Understanding the U.S. Manufacturing Skills Gap and How to Close It,” concluding that the existing manufacturing employee skills gap that has been widely reported is “more limited than many believe.” In contrast to several previous studies and widespread anecdotal evidence from the manufacturing sector, the BCG researchers found only limited evidence of a high-skilled manufacturing labor shortage nationwide — as only 5 of the 50 largest manufacturing centers are currently experiencing significant or severe gaps. High-skilled workers are generally considered to have technical training and industry certification, or an associate’s or bachelor’s degree in a manufacturing-related field.

However, in 102 out of 389 Metropolitan Statistical Areas (MSA), located primarily in the Southeast and Gulf Coast areas with relatively small manufacturing bases, manufacturers are facing skills gaps in specific job categories, such as machinists, welders, and industrial machine mechanics.

The BCG researchers also estimate that the high-skills gap in the United States translates to a shortage of only between 80,000 and 100,000 manufacturing employees, or about 8 percent of the nation’s high-skilled manufacturing labor force of 1.4 million workers. Those estimates differ significantly from other research that suggests a much greater shortage of skilled factory workers.

In this article, we discuss the various estimates of the current skilled worker shortage, consider the demographic trends that will affect the future skills gap, and explore the alternative approaches to closing the skills gap.

Do Skills Pay the Bills?

In its report, the BCG concludes that U.S. manufacturers are trying to hire high-skilled workers at “rock-bottom” wage rates, and that is not what it would characterize as a “skills gap.” As Adam Davidson asks in his recent New York Times Magazine article “Skills Don’t Pay the Bills”: Who wants to operate a highly sophisticated machine for $10 per hour? Answer: not a lot of people. As a result, says Davidson, there really isn't a skills gap. Rather, it’s the unwillingness of manufacturers to pay higher wages that is causing the skilled worker shortage, which is a view that is consistent with the BCG report. 

There is general consensus that a skills gap exists and that it will likely worsen in the near future.

Regardless of exactly how serious the skilled worker shortage is, U.S. manufacturing employment has increased by more than 500,000 jobs over the last three years, as factory payrolls have grown from 11.46 million to 12 million at the end of 2012.

This recent expansion in manufacturing employment has played a critical role in supporting and strengthening the overall economy as it has emerged from the Great Recession of 2009. In fact, there is ample evidence that manufacturing has been at the forefront of the U.S. economic recovery over the last several years, and it’s generally expected that manufacturing will continue to play a key role in the future of the U.S. economy.

According to “Leadership Wanted: U.S. Public Opinions on Manufacturing,” a national survey of 1,000 Americans released in October 2012 and commissioned by Deloitte, a consulting and accounting firm, and the Manufacturing Institute, a Washington, D.C.–based affiliate of the National Association of Manufacturers (NAM), survey results reveal the importance of the manufacturing sector to the health of the U.S. economy.

For example, the national survey results show that 90 percent of respondents rated manufacturing as “important” or “very important” for their economic prosperity and America’s standard of living.

This position is supported by national industry sector data, as NAM reports that the manufacturing sector’s economic multiplier effect on the U.S. economy is significant, with every dollar in final sales of manufactured goods adding $1.48 in economic output from other sectors of the U.S. economy.

It is thus not surprising that when Americans were asked in the “Public Viewpoint on Manufacturing” survey what type of facility they would establish if given an opportunity to create 1,000 new jobs in their community, they placed manufacturing at the top of their lists, ahead of energy, technology, health care, and communications.

Advanced Manufacturing Skills Shortages

While BCG estimates a current shortage of between 80,000 and 100,000 skilled manufacturing workers nationwide, manufacturers themselves report a much higher skilled labor deficiency.

In a September 2011 report, “Boiling Point? The Skills Gap in U.S. Manufacturing,” commissioned by Deloitte and the Manufacturing Institute, an online survey of 1,123 U.S. manufacturing executives across 50 states was conducted, and 83 percent of American manufacturers reported a moderate or severe shortage of skilled workers that translates into approximately 600,000 skilled manufacturing positions that are currently unfilled.

In the not-so-distant long term, the manufacturing skills gap is forecasted to worsen. While the BCG and the Manufacturing Institute differ on the current number of unfilled positions, they both agree that certain demographic realities will contribute to a much greater skilled worker shortage in the future. 

According to the U.S. Department of Labor, the percentage of manufacturing workers aged 55 to 64 years and the share of workers older than 65 years have both significantly increased since 2000. Moreover, the Department of Labor reports that the median age of the manufacturing workforce rose from 40.5 years in 2000 to 44.1 years in 2011. The Society of Manufacturing Engineers predicts that the shortfall of skilled factory workers could increase to 3 million jobs by 2015 due to the aging manufacturing workforce and the resulting retirements of older workers, at the same time that an anticipated manufacturing rebound will increase demand for skilled workers. This expected skilled labor shortfall is reinforced by BCG research that finds 37 percent of manufacturers who had shifted manufacturing to the United States from another country cited better access to a skilled workforce as a strong factor in their decision; only 8 percent cited this as a reason for moving production out of the United States.

Even with a limited skills gap today, the BCG study forecasts a future high-skills gap in manufacturing that could approach 875,000 machinists, welders, industrial engineers, and industrial machinery mechanics by 2020. Nevertheless, whether on the high end or low end of the estimated current manufacturing high-skills gap, in a 21st-century American economy increasingly built on capital-intensive, cutting-edge technology-based “advanced manufacturing,” high-skilled employees are the key to a successful enterprise.

Looking forward, there is general consensus by both BCG and the manufacturing industry that any skilled worker shortages today will be eclipsed by much larger challenges in the coming decade because of the pending wave of retirements. 

Do We Have a “Skills Gap”?

How do we reconcile the fact that NAM is reporting a skilled worker shortage of 600,000, while the BCG’s estimate of the gap is only 80,000–100,000 workers, and Adam Davidson dismissively refers to the current situation as a “so-called skills gap” and a “fake skills gap”?

To start, just because workers may not want to train for a job that has a low rate of pay does not necessarily mean that a real skills gap does not exist. The discussion should not focus so much on whether the worker shortage is 80,000 or 600,000, but rather on identifying the root cause of the skills gap, large or small, and how to address it. Concerns about finding just the “right” labor for advanced manufacturing in the United States is a much more complex issue than has been presented in the popular media. As referenced above, both BCG and NAM have identified current and projected shortfalls in the supply of skilled manufacturing labor, even though they disagree on the magnitude of the deficiency. And the current general demographic shift of the workforce will significantly impact the manufacturing sector in the future due to the aging workforce, a reality that even the BCG clearly acknowledges.

Davidson asserts that manufacturers are only willing to pay their skilled workers $10 per hour, and it is employer stinginess that is responsible for the “so-called skills gap.” In response to that claim, Paul Downs (proprietor of Philadelphia-based Paul Downs Cabinetmakers) wrote in a New York Times blog post, “Why Training Workers Costs More Than You Think,” that his experience as a factory owner was much different than Davidson’s narrative. In fact, Downs personally prefers to pay his skilled workers at a higher rate, essentially saying that you “get what you pay for” in terms of reliable and valuable workers.

U.S. manufacturing employment has increased by more than 500,000 jobs over the last three years.

What Downs identifies as the “Achilles heel” in Davidson’s allegedly low-wage argument is the cost (and feasibility) of extensive on-the-job training. If employers were to assume all the costs of training, it would be very costly, especially for cross-training existing high-skilled workers in a current organization. Downs does a very good job of breaking down the costs of training in terms of lost productivity, the costs of paying someone to train instead of “produce,” and other related and often “hidden” but real costs of in-house training.

The solution to closing the skills gap lies in between these two alternatives – employers’ willingness to pay competitive wages and assume some of the employee training costs, and job-seekers’ willingness to pay for an education and acquire the marketable skills in demand by manufacturers.

Many of the barriers to developing a healthy pipeline of dedicated, skilled workers for the manufacturing sector lie in perceptions. Employers who view labor as capital – and capital that is worth investing in – will view money spent to train their employees as an investment rather than an expense, as Downs suggests. However, he is correct that training requires substantial and possibly prohibitive costs to employers; this is where job seekers must be willing to assume part of the training costs as well by enrolling in training programs at their own expense.

The Manufacturing Institute has developed partnerships with high schools, community colleges, and national accrediting bodies to ramp up the pool of skilled labor – but this isn't happening fast enough for the manufacturers currently experiencing labor shortages.

Recognizing this, the Automation Federation has identified a set of competencies that focus on building general skills, such as personal effectiveness and academic competencies. Building off these competencies, the Manufacturing Institute developed a fast-track program called "Right Skills Now," which incorporates “stackable credentials.” This program comprises college course study for 18 weeks (in specific high-skilled manufacturing areas) and 6 weeks of a paid internship.

Two key outcomes of these initiatives are evident: training is an essential and unavoidable cost to both job seekers and manufacturers, and there is an urgent need to deal with the current and anticipated shortfall of skilled manufacturing workers. Clearly both manufacturers and educators have recognized that there is a skills gap and are on the path to developing programs to minimize it.

What to Do?

It is apparent that some mixture of employers’ and employees’ perspectives is needed. Companies want to have workers who are proficient in general skills – math, science, communication, reliability – and it is incumbent upon the job candidates to obtain these skills at their own initiative and expense. However, more job- and firm-specific skills can be taught to these workers through time-limited internships/apprenticeships in conjunction with formal skills-related educational programs, thus easing the burden on employers to field these costs and allowing employers to observe the performance of potential employees. In the longer term, employers will need to offer an appropriate market rate of pay to retain quality employees, ensuring that they reap the benefits of their personal investment.

The shortfall of skilled factory workers could increase to 3 million jobs by 2015.

If these avenues are made available, then why aren't young people flocking to get trained in a sector like skilled manufacturing with such a high demand for workers? One reason can be perceptual: for years we have been telling our young adults that manufacturing jobs are headed overseas, and that these types of occupations are not a worthwhile educational investment. At the same time, parents and counselors have been encouraging high school graduates to attend college.

The October 2012 Deloitte–Manufacturing Institute survey results give credence to this perception. According to survey results, when it comes to choosing manufacturing as a career choice, only 35 percent of survey respondents would encourage their children to pursue a career in the manufacturing sector, ranking manufacturing only fifth among seven key industries listed. This perception has not yet changed sufficiently to encourage people to seriously consider skilled manufacturing as a viable career choice, enough so that they would invest in the education and training required for advanced manufacturing careers.

Manufacturing’s “image problem” may also be contributing to the skills gap. The correction of current misperceptions of U.S. manufacturing needs to be broadcast to a wider audience, especially to those individuals who can positively influence the critical demographic of high school–age potential manufacturing employees. While the Manufacturing Institute has initiated “Dream It. Do It,” a national career awareness and recruitment program to “engage, educate, and employ” the next generation of skilled manufacturing employees, the manufacturing sector faces formidable obstacles.

The Challenges Ahead

At the same time that some manufacturers are struggling to find skilled workers, there has been a recent trend of U.S. companies “reshoring” manufacturing output and jobs back to the United States from overseas, due to a number of favorable factors that have made domestic production increasingly cost-competitive.

In a recent article in The Atlantic titled “The Insourcing Boom,” author Charles Fishman outlines five trends that have lowered the cost of manufacturing in the United States: rising oil prices, falling natural gas prices, rising wages in China, wage concessions by unions, and increasing U.S. labor productivity. As those five factors have combined to significantly lower U.S. manufacturing costs, many companies like GE have started increasing production at domestic locations, which has been accompanied by an increased demand for U.S. factory workers.

Job seekers must be willing to assume part of the training costs by enrolling in training programs at their own expense.

Some of the 500,000-person increase in factory payrolls since 2010 cited above is surely a natural outcome of the economic recovery, but another part of the increase in employment is coming from the many companies that have reshored production back to the United States in recent years. In a May 2011 report (“Made in the USA, Again: Manufacturing is Expected to Return to America as China’s Rising Labor Costs Erase Most Savings from Offshoring”), BCG predicted that within a few years, China's manufacturing cost advantage will disappear for 70 percent of the products currently produced there for the U.S. market, and increasing amounts of production will be "reshored" and "insourced" back to the United States, with the potential to create 2–3 million new factory jobs in America.

We could be facing a situation in the future where U.S. manufacturers will be trying to bring millions of factory jobs back to the United States at the same time that the industry is experiencing a wave of retirements from the aging manufacturing workforce. In that situation, the manufacturing skills gap will produce an even greater challenge for American manufacturers, and in fact, will increase the urgency of the situation.

Although there are some differences in estimates of the magnitude of the current skilled worker shortage in manufacturing, there is general consensus that a skills gap exists and that it will likely worsen in the near future. Fortunately, the issue of the skills gap is generating a fair amount of national media and industry attention, which is bringing some well-deserved debate to an important topic that is crucial to a key sector of the U.S. economy.

The future of America’s advanced manufacturing sector looks very promising overall, especially if the reshoring/insourcing trend continues and manufacturers can find skilled workers for the factory floor of the 21st century. Now that the manufacturing sector and the education establishment are working together to confront the advanced manufacturing skills gap and train skilled workers for advanced manufacturing, we are hopefully on a path toward resolving the current skilled worker shortage.  

Thomas A. Hemphill is an associate professor of strategy, innovation, and public policy at the University of Michigan’s Flint campus. Waheeda Lillevik is an assistant professor of human resources and management at the College of New Jersey. Mark Perry is a scholar at the American Enterprise Institute and a professor of economics at the University of Michigan's Flint campus.

FURTHER READING: Hemphill and Perry also coauthor “U.S. Manufacturing and the Skills Crisis” and “A U.S. Manufacturing Strategy: Not an Industrial Policy.” James Pethokoukis highlights “A Promising Future for U.S. Manufacturing.” Nick Schulz discusses the “Hard Unemployment Truths about 'Soft' Skills.”

 

Feature image by Dianna Ingram / Bergman Group
Manufacturing photo from Shutterstock

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