No U.S. Skills Gap? Really?

It happened again the other day. I was at an event hosted by Sandvik when one of their customers, Gary Hossler from National Machinery in Tiffin, Ohio, told me a story that I hear all too often: His company struggles to keep up with demand. Not because they don't have enough capacity in their facility. Rather, they cannot find enough qualified workers in Ohio, a hotbed of manufacturing.

"It seems like we came out of the recession as fast we went in, and now we can't keep up," Hossler told me over a lunch of pasta and salad in the spotless showroom of Dynamic Machine of Detroit.

I hear these stories so often that I was quite surprised -- astonished really -- when a press release landed in my Inbox this October from the Boston Consulting Group with this headline: "Skills Gap in US Manufacturing is Less Pervasive Than Many Believe."

It was especially perplexing given that a 2011 study by Deloitte and The Manufacturing Institute concluded that as many as 600,000 manufacturing jobs are going unfilled. That's about 5 percent of the 12 million jobs that the U.S. government classifies as manufacturing. The Deloitte findings, which the report concluded are "remarkably consistent with previous skills gap studies," were based on a "nationally representative sample of 1,123 executives across 50 states and has a margin of error for the entire sample of +/- three percentage points." Their sample spanned all manufacturing industries and included executives at firms with sales ranging from less than $1 million to more than $5 billion.

The methodology is worth noting because the BCG report -- which captured national headlines and could, arguably, diminish attention on this very serious issue -- used an entirely different method of analysis. But more on that later.

Here's what BCG concluded:
1- "We see no evidence of a high-skilled labor gap nationwide."
2- "We estimate the high-skills gap in the US is only 80,000 to 100,000 workers."
3- "Only seven states -- six of which are in the bottom quartile of US State manufacturing --show significant or severe skills gaps." Those were identified as Alaska, New Mexico and Wyoming, where the shortage was described as severe, and Alabama, Nevada, Hawaii and Montana, where it was described as significant.
4- "Trying to hire high-skilled workers at rock-bottom rates is not a skills gap."
5- Workforce "shortages are local, not national, in nature and reflect imbalances driven by both location and job classes."

"Shortages of highly skilled manufacturing workers exist and must be addressed, but the numbers aren't as bad as many people believe," Harold Sirkin, a BCG senior partner and co-author of the research, said when announcing the findings. "Investment in training and skills development needs to be stepped up, but there's little reason to believe that the U.S. cannot remain on track for a manufacturing renaissance by 2020."

Now on to the important piece of the BCG research: the methodology.

BCG explained:

To identify where skill gaps exist in the U.S., BCG -- using wage data and manufacturing-job vacancy rates -- looked at localities where wage growth has exceeded inflation by at least 3 percentage points annually for five years. Wage growth is a widely accepted indicator of skills shortages in other sectors, such as energy; it reveals where employers have been forced to bid up pay to attract hard-to-find workers.

This data was supplemented with a BCG survey conducted in February of 100 U.S.-based manufacturing executives at companies with annual sales of $1 billion or greater.

Now, clearly, my repeatedly hearing the same stories or anecdotes about workforce challenges is hardly scientific. But sometimes a report just smacks of not jiving with reality, and this certainly strikes me as one of those cases. Especially after attending IMTS 2012 in Chicago, where everybody seemed to be talking about the workforce shortage.

So, I tried my best to reconcile my experiences with their report, and I came away with a lot of questions. For example, I question the validity of using wage inflation as the primary metric during a five-year period of analysis that included a Great Recession and depressed wages nationwide. I question using wage inflation in an industry where global competition and supplier contracts keep a lid on prices and wages. I think their survey of manufacturers was too small and focused too much on the largest firms.

What's more, I think much in BCG's own report reveals much about the severity of the problem. For example, having as many as 100,000 unfilled jobs during a period where unemployment has hovered at about 8 percent or more does strike me as severe. BCG's own report also notes that it takes six months or more to fill most high-skilled manufacturing production and engineering jobs. In fact, 35 percent said it took more than six months and 23 percent said it took three to six months, with 25 percent reporting one to three months and 18 percent reporting less than one month to fill a vacancy.

I talked to Gardner Carrick, Senior Director of Strategic Initiatives of The Manufacturing Institute, about why there might be such a large discrepancy between the study done by his organization and BCG's.

"If you were reading a text book," Carrick said, you might expect wage inflation to occur the way the BCG report expected it to based on basic supply-demand dynamics. However, he said that BCG didn't seem to take into account many of the complexities that distort those dynamics in the manufacturing sector and its labor market. "I'm not sure they took those into account," he said. "I think the market is a little more complicated."

Carrick also sticks to his report's assertion that the workforce shortage in manufacturing is a national problem. Indeed, 74 percent of respondents in their survey indicated that workforce shortages or skills deficiencies in skilled production roles are having a significant impact on their ability to expand operations or improve productivity.

"I certainly believe there is a workforce shortage, and I think it's pretty severe," Carrick said. "And that's based on our survey across all sectors and our conversations with manufacturers. They can't find enough people."

But if that were true, BCG's Sirkin told me, manufacturers would be raising wages and hiring people to train themselves, which is why he said wage inflation is a "more appropriate measure" of a skilled shortage. He also insisted that the basic laws of supply and demand still apply here, despite pressures that might seem to mitigate those factors.

"If they can't afford to hire and train, that's a different issue" than a workforce shortage, Sirkin said. "What it is is companies trolling for people at low wages."

So manufacturers: What do you think?