Monday, August 19, 2013

So Many Job Openings, So Little Hiring

In a recent Bloomberg View opinion piece, Peter Orszag, vice chairman of corporate and investment banking and chairman of the financial strategy and solutions group at Citigroup and former director of the Office of Management and Budget, wrote about an odd puzzle taking shape in the labor market: Over the past three years, the number of job openings has risen almost 50 percent, but actual hiring has gone up by less than 5 percent. 

Qualified Workers

Mr. Orszag posited several possible reasons for the puzzling labor market. One is that there is a mismatch between the work that companies need done and the skills that workers have. While such a structural mismatch may explain part of the gap, it seems unlikely to explain most of it. After all, job openings in the retail trade have doubled over the past three years, while hiring has been flat. Mr. Orszag asked, "Is it plausible that we lack qualified workers for these jobs?"

The expected response to Mr. Orszag's question is "no," we do not lack qualified workers for jobs in retails trades like fast food restaurants, home improvement centers and grocery stores. The reason "no" is the expected response is because the typical requirements for those jobs are met by many applicants.

The unexpected response to Mr. Orszag's question may well be "yes," we lack qualified workers, but not in the sense of applicants failing to have the posted job requirements (education, legal employability, etc.). Instead, retail employers have created a large number of "hidden" job requirements the impact of which is to substantially reduce the number of "qualified" applicants.

Hidden Job Requirements

Hidden job requirements, by definition, are not listed in any job posting. They arise primarily from the use by employers of workforce analytics, including data obtained from pre-employment assessments and personal information of applicants obtained as part of the job application process.

There are a variety of pre-employment assessments, including intelligence tests, personality tests, job fit tests, interest inventories and work skills tests. Personality tests are designed to measure an individual’s emotional, motivational, interpersonal and attitudinal characteristics, as opposed to abilities. Personality tests are “growing like wildfire,” said Josh Bersin, principal and founder of Bersin by Deloitte. Bersin estimated that this kind of pre-hire testing has been growing by as much as 20 percent annually in the past few years. Industries that are flooded with resumes such as retail, food service and hospitality are among the ones that use such tests most often, he said. (Please see What Are the Issues? for a look at the challenges to applicants and employers arising from the use of pre-employment personality tests.)

In addition to the responses to the personality tests, applicants provide a significant amount of personal information as part of the application process - names, addresses, employment (and unemployment) history, education, commute times and more. 

All this information is compared to "the characteristics of the most qualified, productive employees within an hourly workforce" and applicants are given a rating of red, yellow or green. Green-rated applicants make it past this first hurdle in the hiring process; red-rated applicants are usually eliminated from further consideration.  

This process, referred to as workforce science, is illustrated in the graphic below created by Evolv, a workforce science company). (Please see Workforce Science: A Critical Look at Big Data and the Selection and Management of Employees)

Impact of Workforce Science on Applicant Pool

Some 60% of American workers earn hourly wages. Of these, about half change jobs each year. According to Evolv, the cost to U.S. businesses of worker attrition and lost productivity is $350 billion annually. 

What should an employer do? Increase starting pay? Raising the wage floors can help offset the costs of worker attrition and lost productivity by making easier to recruit, train, and hold onto workers.  There are numerous studies showing that labor turnover has decreased substantially following an increase in the wage floor.

What do many employers do? Retain workforce science companies to administer personality tests and analyze applicant data. The workforce analytics are designed to screen out applicants based on a variety of factors, including personality, current employment status, commute times and time at current address (looking at frequency of moves). (Please see From What Distance is Discrimination Acceptable for a critical looks at the risks posed to the applicant and employer by certain of these screens.)

The graphic below illustrates the impact of these various workforce science "screens" on the size of the applicant pool (assuming 100 applicants as the starting pool size):

This graphic provides insight as to why the number of job openings has risen almost 50 percent, but actual hiring has gone up by less than 5 percent over the past three years. The application of the various screens significantly reduces the size of the applicant pool for each employer.

The screening "insights" are not unique to each employer, as each workforce science company has multiple clients (sometimes in the thousands) who apply the insights. Similarly, the insights themselves, for the most part, are not unique to a single workforce science company. Thus, many employers are chasing the same subset of the aggregate potential pool of applicants and ignoring all other applicants. Consequently, while the number of unfilled job applications is significant, the positions are all trying to be filled from the same relatively small pool of "green" applicants.

In a perfect market, reducing the supply (number of potential employees) would lead to an increase in prices (wages). As shown in the graphic to the left, shifting the supply curve to the left (from S1 to S2) - the impact of screening the applicant pool - would lead to an increase in price (from P1 to P2). The lower wage labor market, however, is not a perfect market; it is a dynamic monopsony.

In the dynamic monopsony model, employers are unlikely to pay higher wages in order to fill vacancies because they would then have to raise the pay of their existing workers to match the pay offered to their last hire. As a result, in monopsonistic settings, employers habitually operate with unfilled vacancies, rather than raising the wage for their entire workforce.

The dynamic monopsony model results in a workforce that is paid below market wages, as compared to a competitive market, and overworked (as employers habitually operate with unfilled vacancies). Consequently, employee turnover in the hourly workforce market averages approximately 50% a year.

A Different Model

According to "Why "Good Jobs" Are Good for Retailers," an article in the January-February 2012 edition of the Harvard Business Review:

Almost one-fifth of American workers have bad jobs. They endure low wages, poor benefits, schedules that change with little—if any—notice, and few opportunities for advancement. The conventional wisdom is that many companies have no choice but to offer bad jobs—especially retailers whose business models entail competing on low prices. If retailers invest more in employees, customers will have to pay more, the assumption goes. Indeed, it is easy to conclude that employee-friendly Wegmans and the Container Store can offer great jobs only because their customers are willing to pay higher prices.

The presumed trade-off between investment in employees and low prices can be broken. Highly successful retail chains—such as Quik­Trip convenience stores, Mercadona and Trader Joe’s supermarkets, and Costco wholesale clubs—not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors. They have demonstrated that, even in the lowest-price segment of retail, bad jobs are not a cost-driven necessity but a choice.

Employees of these retailers have higher pay, fuller training, better benefits, and more-convenient schedules than their counterparts at the competition. Store employees earn about 40% more at Costco than at its largest competitor, Walmart's Sams Club. At Trader Joe's, the starting wage for a full-time employee is $40,000 to $60,000 per year, more than twice what some competitors offer.

Not surprisingly, employee turnover is low. Quik-Trip's 13% turnover rate among full-time employees is substantially lower than the 59% average rate in the top quartile of the convenience store industry. At Trader Joe's, turnover among full-time employees is less than 10%. At Mercadona, it's a mere 4%.

Taxpayer Subsidization of Lower-Wage Employers

The use of workforce science has created separate and unequal classes of low-income job applicants For those that make it through the screening, jobs are readily available; however, due to the dynamic monopsony model, wages and benefits offered for those jobs are less than what would be experienced in a free and competitive market. 

Widespread use of the workforce science screening process results in the creation of an "economic underclass" comprised of those applicants whom the screening process eliminates from employment consideration. Consequently, taxpayers provide significant support to those applicants rejected by workforce science in the form of social support programs like Medicaid, SSDI, SSI and SNAP. This, notwithstanding that the insights utilized by workforce science discriminate against lower-income workers, including blacks, Hispanics and persons with mental illness (including returning veterans, new and expectant mothers and LGBT persons). (Please see From What Distance is Discrimination Acceptable, Tests Discriminate Against Returning Veterans, Tests Discriminate Against New and Expectant Mothers and Tests Discriminate Against LGBTs.)

Even those who made it through the workforce science screens and find employment are supported by taxpayer-funded public benefit programs. These programs make up the difference between the low wages and the costs of subsistence.

As an example, after analyzing data released by Wisconsin's Medicaid program, the Democratic staff of the U.S. House Committee on Education and workforce released a report in May 2013 estimating that, at the low end, a single 300-person Walmart Supercenter store in Wisconsin costs taxpayers more than $900,000 per year.

Wisconsin released data on Medicaid enrollment by employer as of the fourth quarter of 2012. Walmart ranked first on the list with 3,216 of its employees enrolled in the state's Medicaid program, BadgerCare+. Including the children and adult dependents of these employees, Walmart accounts for more than 9,200 enrollees in the program.

The cost to taxpayers arises from the following programs utilized by low-income Walmart workers: BadgerCare+, reduced lunch prices under the National School Lunch Program, reduced breakfast prices under the School Breakfast Program, subsidized housing assistance under the Section 8 Housing Program; Earned Income Tax Credit, Low-Income Home Energy Assistance Program, Supplemental Nutrition Assistance Program, and Wisconsin Shares Child Care Subsidy program.

Employers paying minimum wage or slightly more rely on taxpayers to subsidize their payroll. Taxpayers cover the cost of workers' health care and significant portions of their housing and food costs.

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