Posted by: Josh Lehner | April 13, 2018

Downskilling in a Tight Labor Market

In a tight labor market, bargaining power shifts back toward workers to some degree. Businesses have a harder time attracting and retaining workers. Wages are bid up and firms need to dig deeper into the resume stack to hire candidates they previously passed over. Workers themselves feel more confident in their prospects and more likely to quit or switch jobs. All of the above is happening more today and one item I am trying to track is whether or not firms are downskilling their positions in order to fill them.

What I mean is during and after the Great Recession, employers upskilled many positions. That is they added additional education or experience requirements for new hires. Some of this was so firms could be more productive during tough economic times. Some was likely taking an opportunity to shift the nature of these positions and head in a different direction. But we also know some upskilling was used more as an HR screen during a time when employers were flooded with applicants. Remember, there were 10 or 12 unemployed Oregonians for every job opening. It was clearly a buyer’s market. Downskilling is this process in reverse; employers loosen requirements, particularly those of less importance to the tasks and duties of the position.

In practice we know this is happening to some degree. The share of prime working-age Oregonians with a job had essentially returned to pre-recession rates for each level of educational attainment. Surveys show that Oregon businesses are having trouble finding workers in general, rather than pointing at technical or soft skill “shortages” as much. Additionally, relatively new research from Modestino, Shoag, and Ballance finds that:

“… a 1 percentage point reduction in the local unemployment rate is associated with a roughly 0.27 percentage point reduction in the fraction of jobs requiring at least a bachelor’s degree and a roughly 0.23 percentage point reduction in the fraction requiring 5 or more years of experience.”

However, I couldn’t just leave it at that so I turned to the LEHD data to look at educational attainment for new hires in Oregon. In the chart below the blue dot is the share of new hires by industry with a college degree in 2010 which was the bottom of the cycle and also when the college graduate share was highest. The red dot is the share last year. Overall a smaller share of new hires in Oregon do have a college degree, however these changes vary considerably by industry. What is most surprising about this data is that the industries with higher levels of educational attainment have seen the largest declines. Counter to that, industries with lower levels of educational attainment, like retail and leisure and hospitality, have seen their college graduate share stay steady or even rise during the economic expansion.

One possibility for the drop in the share of college graduate hires could simply be the industry mix. Sectors with lower levels of educational attainment are hiring more than those with higher levels of educational attainment. This does appear to be in play, but accounts for a minority of the overall decline. The majority is due to a lower share within industries. This is possible evidence of downskilling.

Another possibility for these patterns may simply be a shift in the occupations that businesses are hiring, which may or may not be true downskilling. After running lean for years, firms may now be filling out their office support staff, or their sales teams and the like in greater numbers. This shift would alter the educational attainment figures, but for a different reason. However, even as these middle-wage jobs are growing again, I cannot say for sure this is driving the pattern seen in the data, but it is a possibility.

Finally, given the EPOP gains for those with a high school diploma and especially for those without a diploma or GED, it means firms are hiring fewer associate degrees or those who attended college but did not graduate, the so-called “some college” group. This is clearly happening in the new hire data as well.

Again, the differences across industries is interesting. Here you can see that while retail and leisure and hospitality may not be hiring a smaller share of bachelor degree holders, they are hiring more high school, or less than high school workers.

Overall these patterns are interesting. Businesses are responding the shifting nature of the business cycle. As Modestino, Shoag, and Ballance note, some of the upskilling may have even been optimistic, however as the economy changes, so too may firm needs.

Finally, there is one labor issue our office is hearing more about: drug testing. We always have people come up to us after presentations to discuss issues and concerns, however it seems like more of these involve finding workers who can pass a drug test. This goes for both individual companies and for temp agencies. We don’t have a good answer and it seems puzzling to us. Right now there are two main issues: first and foremost a tight labor market means it is harder to find workers in general, and second many of these testing failures are marijuana-related it seems, which is obviously legal in a growing number of states. One possibility we have heard that makes some sense is that a drug-free workplace is important for insurance reasons. This is particularly true in construction where general contractors require subcontractors to employ drug-free workers. Another possibility may be compositional. Drug testing for some companies may be the last requirement they are unwilling to budge on (understandably so in some cases) and so drug testing becomes a larger share of their labor problems in a tight market but is not necessarily a growing problem in total. The darker timeline would be drug issues truly are a growing problem. Any thoughts you have on this please email me.


  1. […] in places where participation is down but likely to respond in a strong economy. Employers may also downskill some positions by having fewer skill and/or work experience requirements. Similarly, on-the-job training becomes […]

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