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The Skills Gap Lie

The "skills gap" is a lie and we've all been duped. Well, everyone with the exception of Suresh Naidu.

Suresh is a professor of economics and international and public affairs at Columbia University as well as a fellow at the Roosevelt Institute, external faculty at the Santa Fe Institute, and a research fellow at the National Bureau of Economic Research, for starters.

Needless to say, this interview is heady so prepare to take notes as we talk deep workforce economics, monopsony, market power, unions, and believe it or not the Company Town still exists.

Na na na na na... Our podcast is smarter than yours!

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INTRO (1m 1s):

Hide your kids! Lock the doors! You're listening to HR’s most dangerous podcast. Chad Sowash and Joel Cheeseman are here to punch the recruiting industry, right where it hurts! Complete with breaking news, brash opinion and loads of snark, buckle up boys and girls, it's time for the Chad and Cheese podcast.

Joel (1m 23s):

Ivy league in the house. What's up peeps?

Chad (1m 28s):

I don't think they do that. I don't think they do.

Joel (1m 32s):

He's not Marxist. He's just Canadian.

Chad (1m 35s):

Or both, or both. That's right. All right, kids. We have Suresh Naidu in the house today. He holds a Bachelor's of Mathematics from the University of Waterloo, a Master's of Economics from the University of Massachusetts Amherst and a PHD in Economics from a little University of California called Berkeley. He's a professor of Economics and International and Public Affairs at Columbia University, as well as a fellow at, I'm losing my breath here, man, Jesus, at Roosevelt Institute, external faculty at Santa Fe Institute and a Research Fellow at the National Bureau of Economic Research.

Joel (2m 20s):

And right about now, he feels like he's been punked because he was on the wrong show.

Suresh Naidu (2m 23s):


Chad (2m 23s):

We don't these, we don't give these types of intros, but we don't. We talk about economics in the, obviously the vein of workforce, but we don't have economic professors on very often, but quick story. I was, I got up one Saturday morning and I did my normal routine. I was listening to one of my favorite podcast, Pitchfork Economics, and the, it was called the powerlessness of forced labor. And there was this really cool concept of a forced labor. Not really cool, but it was something that I really hadn't heard before. And this Professor Naidu was on talking about it.

Chad (3m 4s):

So I thought, man, this is pretty awesome. I went down to the family room, turned on Netflix, and I wanted to watch this documentary for a few weeks called Capitol. And the next thing you know, about five minutes in there, you are looking at me square in the face. So you should probably add Netflix and podcast star onto that bio.

Joel (3m 24s):

And then he FaceTimes me like he he's a four year old who just saw Santa Claus. Chad is still excited for this interview right now. I hope I hope you're up to it.

Suresh Naidu (3m 35s):

Oh, I hope I can fulfill expectations. Yeah, yeah, yeah. You guys are going to do a lot of post-processing so I know I'll sound good.

Joel (3m 43s):

What did we miss about you, Chad rattled off your degrees and all, you know, all your little labels, but what do we need to know?

Suresh Naidu (3m 50s):

I, then I, then I'm from Newfoundland. Yeah. I mean, I'm, I'm substantially less than that list of titles, but yeah, actually I, a good way to like spring board into this is actually like how I got into economics was actually like, I worked, I was a math major and I wound up spending a summer working on a vegetable farm in Northern Ontario with all these guests, migrant workers. I remember one of the things that like really sort of stuck with me there, was one guy he liked cracked his wrist while cutting lettuce, but he didn't report it because he knew that if he sort of said, I've got a problem with my wrist, he'd get sent back to Mexico and wouldn't get reinvited next year.

Suresh Naidu (4m 31s):

And, you know, for him, a guy with a bachelor's degree, actually in Mexico, but for him like working, like doing lettuce cutting in Northern Ontario was a more lucrative gig than an office job in Mexico. That just stayed with me. And I think it was one of the things that motivated me into becoming an economist and particularly like interested in labor and development and these issues.

Chad (4m 51s):

So you've, you've performed a ton of research around a term called monopsony. Now we've heard the monopolies before, but, but monopsony, isn't something that rolls off the tongue. Well, first and foremost, but can you tell us what that term means and how that actually affects really wages the workforce, the economy overall?

Suresh Naidu (5m 11s):

Basically, if monopoly's is basically when a company has, is not facing so much competition, so that it's able to raise the price, it loses a few customers that aren't willing to pay that price, but it makes more profits off of those that it keeps. You know, that's why monopoly's has an incentive to raise prices is because they can and because they make additional profits. So monopsony is basically that's, that's what a monopoly is selling a good I'm an abstinence is a buyer of a good, and they, again, face sort of limited competition from other buyers of the good. And so that means they have an incentive to pay a lower price or wage. They're not going to be able to keep as many workers as they might have. So you're going to see higher quits. You're going to see it takes a little bit longer time to fill a vacancy, but you're making profits off of all the ones that stay with you, so that it's worth it.

Suresh Naidu (5m 59s):

And so it used to be thought that like monopsony was just a property of these like company towns, like Butte, Montana, where you have like a copper mine, and basically all the workers have to work for the copper mine or nothing else. And it was only thought that monopsony was a property of the sort of weird one shop town. But I think basically starting in the late nineties and sort of accumulating momentum came this idea that actually we should just think of like the laissez fair labor market as being characterized by having some degree of market power. Because from the point of view of a worker, you know, finding a job, as good as a job that you got is actually not super easy. You've got to both spend some time searching jobs, are complicated.

Suresh Naidu (6m 44s):

They're like your house, there are these what we call quote unquote, "high dimensional". There's like lots of characteristics about them that matter for whether or not you like it or not. It's like, do you get along with your boss, you go along with your coworkers, does it work with your childcare, with the commute? All of these things matter. And so that means the jobs that perfectly substitute for each other, a few and far between. And so that means that every employer is facing this kind of, has a degree of this monopsony power that they're able to like lower the wage a bit. Some people quit, but a lot of people stay. And so they're willing to tolerate the additional turnover, in exchange for the higher profits they make off of every worker.

Chad (7m 23s):

But you know, let's jump into that real quick. So, you know, in reading some of your, your writings, one of the things that really hit me hard because we were talking about the company town and we thought those were all pretty much gone by now, that the days of the coal mines and a town rising up behind the coal mines. But, you know, then I started to think about nursing. So the median wage for a nurse is about $68,000. And given what we know about the labor markets and the power of medical institutions, the true competitive wage for a nurse should be about $90,000 to $200,000, depending on the experience level.

Chad (8m 2s):

However, because most areas have few hospitals, they can suppress nurses wages without the nurses having an opportunity to move anywhere outside an actual medical system, or even teaching. We have the Bartholomew County Consolidated School Corporation here, which pretty much is all of the schools. So where is a teacher to go? Is that what we're talking about? What we're talking about, suppressing wages and more of a company town mentality.

Joel (8m 33s):

And by the way, in recruiting, that's what we cover. We hear a lot about, we can't find enough nurses. We can't find enough teachers. So logic would tell you that they should be higher priced because they are so hard to find. No?

Suresh Naidu (8m 45s):

Yep. And that's partly why this looks like as it relates to what we're going to talk about later, but the myth of the skills gap, it's like whenever somebody's complaining about shortages, it's like, have you tried raising the wage? And it's very rarely floated as a solution to shortages, is raised the wages. you have to just think about it from the perspective of the employer. They're like, you know, we're willing to tolerate this, this shortages because we're making profits off all the existing workers. And if we want it to bring in more talent, we'd have to raise the wage. And that would entail raising wages for all the other workers. And that would be costly.

Joel (9m 20s):

Casue we do know that like three out of four nurse nursing degreed professionals don't actually practice nursing. And it might be the same with teachers. I don't know.

Suresh Naidu (9m 29s):

I think there's a lot, I mean, it's interesting, right? Both nursing and teaching are like sectors that are, that were historically quite female. And it used to be the case, that actually the theory of monopsony was, was sort of invented and determined coined by this famous female economists of the 20th century, John Robinson. And one of the original applications of it was this idea of explaining the gender gap. Because the, I, you know, the norm was always that men would move their whole family's for their jobs, but women would not move locations for their jobs and employers know that. And so they're able to chisel away at women's wages, not because they're sexist, but because they know that women are just less likely to leave in response to a low wage.

Suresh Naidu (10m 13s):

And so that was kind of an original motivation for monopsony was this like way to explain gender gaps. And that's why you sort of see it and then sort of compound that with these occupations, like nursing and teachers, where the credentialing is often like, it's in a very limited set of employers. And so when you don't have a union kind of offsetting the power of employers, what you'll get is that employers are quite willing and that employer, it could be a government that's very interested in skipping on its budget to keep cut costs, tolerate higher turnover, tolerate fewer recruits, but be saving money on wages, their incentives to do that are more, the less options those workers have.

Chad (10m 58s):

So let's dig into that because, that's interesting to say that, look, we can have fewer workers, which means less, the less we have to pay out in wages, but we can have not as high as production, but even just enough production to increase the profit margins. Is that what I'm hearing?

Suresh Naidu (11m 18s):

Exactly. So this is like one of the things about monopsony is that it tells you where there's a wedge between profits and production. So like things like reducing monopsony power can increase, you know, your willingness to hire, it will increase your output and your sales, but it might cost you in profits because that comes at the expense of like additional wages, a higher payroll, et cetera. And so companies might not want to be employing all the workers that they can because they want to make sure that payroll isn't exploding. And so they don't necessarily try to maximize revenue, total revenue. They try to maximize revenue per worker understanding that there's like a cost of hiring additional workers.

Chad (11m 59s):

So the theory of wage growth is interesting because in capitalism, the theory is wage growth is flat because of rising competition from low paid workers in foreign countries, aka globalization and automation. How does that jive with what's actually happening?

Suresh Naidu (12m 15s):

Yeah. So I think they're complimentary, it doesn't have to be one, one or the other, for example, like one of the things that, and let me just kind of give the, the, the general story is that a lot of the ways in which simultaneously, when you have what we call in economics, like a labor demand shock, a negative labor demand, shock, where like, people don't want to, like employers just don't need that many workers. There's a simultaneous thing that's happening, which is that often like a bunch of businesses are going under. And so that's raising say concentration in that labor market. So you can imagine places that got hit by NAFTA, by Chinese manufacturing, though, it's not just that, like employers didn't want their workers. It's also that those employers that were left standing now had additional market power.

Suresh Naidu (12m 58s):

And so there's two, there's two things happening. It's both that employers are like, you know, I don't have the volume of sales needed to hire all of you, sorry, but it's also the case that because a whole bunch of employers have like exited from the labor market. There's now like each, though, the employers still standing have like a higher degree of market power.

Joel (13m 17s):

Suresh you mention labor unions. And I've always been surprised, you know, Chad and I grew up in the seventies and I remember, you know, stories from my grandfather about Jimmy Hoffa and Cesar Chavez and things like that. And unions seem like they're just not around anymore. And I'm always surprised as to why, why don't all the Amazon workers get together and improve their position in life. And it doesn't happen. And I'm curious your take on why, why are unions so weak? Why are they not, you know, growing what's going on that is making them so stagnant and neutral in this whole equation.

Suresh Naidu (13m 56s):

I've done a bunch of work on unions. So let me give you some cross-country of it. So it's not the case that unionization has declined to the same extent everywhere. You actually have the sort of subset of countries in, in Western Europe that are called like Ghent system countries. So the Ghent system was basically a system that administered unemployment benefits through labor unions. So this meant that when the country, all countries were going through this recession in the seventies and eighties, but in the countries with a Ghent system, union decline didn't happen at all, because everyone's had to stay with the union in order to get there in order to get their UI. But in the non-Ghent system countries, union density got hammered because those jobs just went away.

Suresh Naidu (14m 37s):

And if they ever came back, they were not coming back as union jobs. And that's a little bit like symptomatic of like the particular strange, like legal architecture of unions in the U S kind of inheriting from the 1930s and forties, where we kind of have a model of unionization that isn't based on unionizing, a whole sector or whole industry instead like unions in the U S kind of go like establishment by establishment. Like you run an election, you win union recognition at a given establishment, and then you have to do it again. And so this makes it really hard for, I think, service sector employers in particular, to get unionized, because like, if you only unionized one establishment in the service sector and you drive up costs, it's very easy for new competitors to come in and take away and at lower cost and like take away your business.

Suresh Naidu (15m 30s):

And so you kinda need like a collective bargaining model that lets you sort of cover a whole bunch of employers at once. So that new employers are like, can't compete on lower wages. They have to pay the same wage standard and then force them to compete on like better products and other costs, but not compete on lower wages.

Chad (15m 50s):

But one thing, Suresh. And this is the thing that I think has been defunked by the new Rand research, Rand corporation research, is that we're always talking about, well, if you pay, if you pay workers more than you have to raise the product prices and that is turned out to be utter bullshit. And the reason being is the 1% has been siphoning wages from the lower 90%. So the money is there. It's not about giving the money to the 90% that's not there. It's about the 1% who's been taking it all in the first place. So there's this huge disparity in wages and the wage gap has grown so much and it, it seems like it's happened all around the ability to break up the unions and not to ensure that individuals are actually getting living wages.

Chad (16m 41s):

I mean, the wages have been stagnant since, since, I mean what the '70s?

Suresh Naidu (16m 45s):

'73. Yeah. So, so my academic hat comes on and I'm just like, well, it's more complicated. Like I, you know, I'm really have to like, feel like I have to disabuse of my students. A lot of my students have less sort of like ideas, like, Oh, there's this big conspiracy of the 1% to like take money from everybody else. And it kind of, as, as an economist, I'm like, I'm really skeptical of strategic stories like this because man, most people are incompetent at everything. And so yeah, if it was a conspiracy remarkably poorly executed. So I, and I think it's more that there was this, like, you know, there was definitely a reconfiguration of political power by the right and by business, but in some ways it actually wound up biting you in the ass some ways.

Suresh Naidu (17m 35s):

And like, so for example, like a lot of the energy behind sort of Reagan, was kind of coming from the national association of manufacturers and then they get hammered by globalization. So it's like they wanted this thing. And then they kind of, you know, it winds up coming back and hurting them. And so I think it's not, and that's just an example of like, there's lots of places where the 1%, for example, people like, you know, they include, they're mostly, they're mostly CEOs. Let's be clear that, but there's ways in which like the they're also like doctors and like the highest paid like a good chunk of the 1% is really high-end doctors that are catering to, you know, say the upper middle class and charging an enormous amount of money, money to both those patients and also Medicare & Medicaid or, and particularly Medicare and sort of pocketing that.

Suresh Naidu (18m 32s):

And so there's, there's so many interesting and complicated mechanisms by which the 1% has pulled away from everyone else that I almost think like we lose how it, how we don't keep sight on the tools it would take to fix inequality if We just kind of pose it as like a 1% taking everything. We need to kind of like adjust so many and we can do it, I think it's like, but we, we need to have like specific tools for adjusting the pulling away of the 1%. And I can go through this, like taxes, it'll be, anti-trust, there'll be a Medicare for all, you know, all these things and as well, like pushing up wages at the bottom.

Chad (19m 9s):

Well, unions.

Suresh Naidu (19m 10s):

And unions. Yeah. Unions are the big, our big tool.

Chad (19m 12s):


Suresh Naidu (19m 13s):

And, you know, if there's one thing I hope of the, you know, the one time the U S really put a dent in inequality was in this period between 1935 and 1947, where like union density went from like, you know, something like seven to 10% to like 30, 20 to 25 to 30%. And it goes up in very particular States. It goes up in like Michigan, Connecticut, New York, California. And those are exactly the States that inequality falls in. This is like a recent paper, I finished where we basically, you know, advertise it, it's that economist couldn't really look at unions before 1973, because the census Bureau never asked it. So what we did in this paper is we found old Gallup polls.

Suresh Naidu (19m 57s):

So it turns out Gallup was always asking, are you a union member? In all of it's poll's back to 1936. So you could put all these Gallup surveys together and actually measure, who is in a union all the way back to like 1936. And you can kind of show like, you know, that people that are joining unions in the thirties and forties are much lower education than non-union members. They're much more likely to be black than non-union members. And so like that pressure of increasing union density for low wage workers, just did a huge lift in kind of creating this 1950s and 1960s period of relative equality.

Joel (20m 37s):

And I'm curious, CRS your take on, we talk about the gig economy quite a bit, and logic would say, Hey, if there are more gigs available, more opportunities to make more money, more competition, to pay people more. So, you know, my driving for Lyft or my driving for Uber while I get paid more here so then my wages go up. We're seeing, you know, cases out in California where they want to treat gig workers as employees. So that throws a whole different mix into what's going on. Are you pro gig economy, anti how does this play into the whole equality?

Suresh Naidu (21m 10s):

Yeah, so, I mean, we should recognize that it's like, a lot of these platforms are not, you know, it's like they take something off the tail, right? So there's like a 20% like claw on top of every transaction and the gig economy, that's going to the platform. And we should ask, like, how did they pick that number? And they picked that number because they are the sole platform providing that service of matching. And so that gives them a fair amount of market power, Vis-à-vis, both like say the drivers and the customers. And you can kind of see this by looking at it. This is like strange, but like ride Austin is like a ride sharing company that was like a nonprofit that basically just charged like a fixed a dollar per ride.

Suresh Naidu (21m 51s):

That is what they took. Yeah. And so it's interesting that that could work pretty well, and it didn't necessarily require, you know, and could offer a pretty good deal for customers without requiring taking so much off the top. I am suspicious of platforms that sort of, advertise themselves as like, we're just an algorithm, because if you are just an algorithm then nothing, then why you're taking this 20% off the top of why not just like, let anybody enter with their own algorithm.

Joel (22m 22s):

Can anybody? I mean, you're basically saying that Lyft and Uber are racket.

Suresh Naidu (22m 26s):

If they were just the software company, it would be very easy to like it, you know, to open source their software. And so they're trying to claim that they're like just a software company, but in fact, they're actually employing drivers and you can kind of see it and, you know, it's coming up in this prop 22, you can see it in just the descriptions of the tasks of what they ask from drivers. If you like saw that in any employment contract, you would think that's an employment contract, but because it's like mediated through the app, Uber kind of gets to put itself at arms length and say, no, we're like just, you know, we're just a platform.

Joel (23m 0s):

So the other defense on that I'm hearing is basically franchising drivers. And there's a great Planet Money. I don't know, if you listen to that podcast or not, where they actually interview a truck driver. And she goes through the whole education of being a truck driver and then at the end, they say, do you want to be an employee? Or do you want to sort of be a franchise and have your own truck? And they sort of steer her into the franchise model. Of course, she wakes up and says, I'm getting more bills from the company. I'm in debt. And eventually she just, she drove the truck back to where she got it and left the keys in the car and left. Is that kind of where the gig economy is going?

Suresh Naidu (23m 40s):

I think so. I think that is a good, I mean, there's a good book called the, the Secret Life of Groceries that sort also talks about the trucking industry is just kind of this, this hot mess of putting people into these debt contracts and says you're an independent contractor and then forces them to bear all of the risks of the job. You kind of see it with around the response to COVID. I mean, in talking to people, you sort of see like people that were actually employees could get on UI much more easily had employers that help them with UI while the people that were on like franchising models were just like, you know, just nothing and even had a hard time getting UI.

Suresh Naidu (24m 20s):

And so we're lucky that they actually like during the pandemic unemployment assistance, like did cover gig workers, but note that no platform paid into payroll paid any payroll taxes to pay into that. So like if you are going to have your workers have the benefits of unemployment insurance, for example, then you gotta be paying the payroll tax.

Chad (24m 45s):

So back to monopsony real quick. I mean, because you talk about a monopsony tax where individuals are actually getting paid lower wages and the company keeps the, let's just say, it's pre-taxed, they just keep it. The individual still gets taxed, but, and they're getting paid the lower wages that company doesn't have to, obviously, if you're an Amazon, you're not paying taxes. So we start to see that the eroding of infrastructure of public schools, of all this that we have that government pays for, because monopsonies happening. Can you explain that a little bit better?

Suresh Naidu (25m 24s):

A bit of background there. So one is that I don't know and I think we don't know as whether or not monopsony itself has increased over time. I think there's like, but I think what has happened is that a lot of the countervailing institutions that restrained monopsony. Think unions, but also think things like internal labor markets, the fact that you used to have, like your janitors in-house and now you've outsourced them. You know, I think they're, you know, other things about like employers being much more willing to like differentiate wages between high skilled and low-skilled workers. A bunch of these other things have happened that made the monopsony power that was in the background now becomes more used.

Suresh Naidu (26m 8s):

And so it might be before, you know, there was, you always had some monopsony power, but you weren't really quite able to use it, or you didn't have the incentives to use it. But then as these other countervailing forces have diminished, now you're kind of able to see, now monopsony is kind of the thing that's operating in a way that it wasn't before. And so let me give you an example of that is now that you can employ a lot more of your, you can surveil your workers a lot better. So it used to be like in order to keep your workers from stealing from you, for example, let's imagine that you pay them a higher wage so that if they quit, if you know, so that if you caught them shirking or stealing, you would just fire them.

Suresh Naidu (26m 50s):

And the fear of being fired would be enough to like deter employer slack, workers slacking off. But then as you get better at surveillance and you put in more electronic cameras in your shop and just monitor your workers on closed circuit television all the time, you don't need to pay them that higher wage in order to make sure that when you catch them, they're like afraid of being fired. You can now just catch them, much more easily. And so that means that you don't, you know, now you don't pay that what we call that an efficiency wage. You don't pay that anymore. So now you're much more just worried about their propensity to quit or leave in response to like your wage. And so now monospony becomes the binding constraint, as we say, in economics.

Joel (27m 35s):

Well, Suresh, we know you're a busy guy. We greatly appreciate your time. We need to have you come back on because I got about 50 questions that have gone unanswered. So if you can come back sometime, we'd certainly love it. But for those, for those listeners out there who want to know, want to know more about you and your research, where would you send them?

Suresh Naidu (27m 55s):

You can go to my website, which is, or you can find me on Twitter. It says probably a better place to get into

Joel (28m 6s):

Yeah. For our, for our audience. That one's easier. Suresh. We appreciate it, man. And Chad, We out.

Suresh Naidu (28m 13s):

Thank you so much.

Chad (28m 14s):

We out.

OUTRO (28m 14s):

Thank you for listen to podcasts with Chad and Cheese. Brilliant! They talk about recruiting. They talk about technology, but most of all, they talk about nothing. Anyhoo, be sure to subscribe today on iTunes, Spotify, Google Play, or wherever you listen to your podcasts. We out.


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