US Labor Skills Shortage: Fact or Fiction?

Headlines claiming the United States is facing a skilled workers shortage are glaringly at odds with an unemployment rate of 8.2%. Fears of getting caught in a wage inflation spiral similar to the prerecession boom have companies scrambling to understand just where the shortages lie. While we anticipate a skilled labor squeeze occurring over the next five years, a shortage that would risk double-digit wage increase is not likely. This does not mean skilled laborers are readily available for hire. Rather it shows that more skilled workers are less mobile, and are seeking or have found employment outside of their former industries, increasing sourcing challenges for skilled occupations.

Where Have All the Workers Gone?

The US construction industry remains in the doldrums—real total construction spending in 2012 will come in more than 40% lower than prerecession peaks. On a level basis, nonresidential spending fared better than residential construction spending during the recession, but construction spending in this sector will remain flat for the next two years. Data from the Occupational Employment Statistics Survey issued by the Bureau of Labor Statistics for the four skilled labor occupations that IHS tracks (boilermakers, electricians, pipefitters, and welders) suggest that nationally, there is an ample supply of workers in these occupations. Compared with peak levels, 15% of boilermakers and 21% of electricians, pipefitters, and welders were unemployed in 2011. With employment levels so low, many wonder why it is so difficult to find skilled workers.

Not All Regions Are Created Equal

While a national look at the construction industry paints a woeful picture, it glosses over the regional dynamism of the American economy. Comparing real construction spending to the 10-year spending average before the recession, current nonresidential spending in the Gulf Coast is only 1% below the long-term trend. In comparison, areas such as the Southeast, Midwest, and West Coast are roughly 25% below their trend average and are unlikely to return to peak levels soon. Areas of stronger growth such as the Gulf Coast and Mountain region will experience tightening labor markets earlier than slower growth areas such as the West Coast, Southeast, and Midwest. This means it will be harder to find skilled labor in high-growth regions. The regional occupational data for skilled professions demonstrates this variation. Estimated unemployment for skilled occupations in the Gulf Coast is 11%, much lower than the West Coast at 34% and the United States at 19%.

But Why Not Seek the Land of Opportunity?

Flexibility is a key characteristic of the US labor force, but the housing bust constrains this flexibility. With the average American losing 16% of their wealth from the housing correction, US workers are more reluctant to relocate. Unfortunately, US regions with the highest unemployment rate for skilled workers are also the markets suffering the largest decline in median existing home prices. Since housing prices are just beginning to inch up again, there is currently a substantial relocation cost for skilled workers.

Instead of moving to another US region and seeking another construction trade position, skilled workers are looking outside their previous industry for employment. A recent working paper released by the Federal Reserve Bank of San Francisco examines the industry-occupation mix of job openings and hires. Over the sample period (April 2005 to March 2012), the construction industry was the most likely to hire workers previously employed in the same industry. However, the report also finds high levels of cross-industry and cross-occupational mobility, suggesting that workers formerly employed in the construction industry or construction occupations will be hired outside of their previous occupation/industry group. The most likely industries to hire former construction workers were manufacturing; mining; and transportation, warehousing, and utilities.

Feeling the Squeeze

As the construction industry finds its footing once again, companies might compete against manufacturing, mining, utility, and transportation and warehousing companies for top skilled talent. While manufacturing, transportation, and warehousing wages for skilled professions are roughly on a par with wages paid by the construction industry, the mining industry pays a premium of 16% for skilled workers, while utilities pay a premium of 19%. This builds more upward pressure to top-tier talent. This is particularly true for welding professionals who are highly concentrated in manufacturing and mining industries—as these industries continue to grow, we will see the labor market for welders tighten the fastest.

A further challenge is the aging of the labor force. Between 2001 and 2005 the percentage of the labor force between the ages of 16 and 34 fell from 39% to 35%, while those workers 55 and older have increased from 9% to 15%. More skilled workers reaching retirement age and fewer workers entering skilled trade occupations will further increase competition for top-tier talent.

Where Are Wages Going?

Skilled workers will continue to experience stronger-than-industry growth, but will not resume the growth rates experienced during the construction boom. Regional variations will remain, with the Gulf Coast and Mountain region experiencing stronger than average growth supported by healthier nonresidential construction markets, a strong energy sector, and lower unemployment, while the West Coast, Pacific Northwest, and Southeast continue to lag behind the rest of the country.

Bottom Line: Skilled workers are out there, but workers in depressed regions are less willing to relocate and are finding jobs in other industries. Going forward, construction firms may find themselves increasingly competing with mining and utilities companies for skilled workers, particularly in welding occupations. Wage rates for skilled workers will out-compete industry averages. Nevertheless, we do not foresee a return of the strong wage rates experienced during the construction boom.

by Emily Crowley