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.

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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