“Equitable Growth in Conversation” is a recurring series where we talk with economists and other social scientists to help us better understand whether and how economic inequality affects economic growth and stability.

In this latest installment, Heather Boushey, Executive Director and Chief Economist here at Equitable Growth, talks with Byron Auguste, Managing Director of Opportunity@Work. The two discuss the current problems with the labor market, how these problems may be mostly on the demand side, and how we might “rewire” the labor market.

Read their conversation below.

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Heather Boushey: Byron, thank you so much for talking with us. The big topic that I want to focus on with you is about the demand-side problems when it comes to opportunity in the labor market. When we’re thinking about policy, we think a lot about the supply-side problems. And I know that you’ve spent some time thinking about the demand side and I’m eager to learn more from you.

Since the end of the Great Recession, the number of job openings in the United States has increased much quicker than the number of hires. And many economists have been interpreting that as a sign of supply-side problems—that workers don’t have the skills that employers are looking for. But you actually see this as a demand-side, or employer-side, problem. Can you tell us why?

Byron Auguste: The first step to really understanding what’s going on in the labor market is to think about it as a market, take it seriously as a market, understand its market characteristics, the information that’s available to the different actors, the incentives that they face, and then to look at their actual behavior and how it’s changed over time.

Over the past 30 years, there’s been an increasing sense that somehow there are these mismatches in the labor market. We have a situation where in 2015, open jobs that employers were trying to fill in the United States were at a record high, while at the same time, labor force participation among working-age adults was at a 40-year low.

A number of commentators and particularly businesspeople talk about this as a skills gap, which gives the impression that if only people were getting the right skills or more skills there would be no problem. But if you look at the labor market, both the changes in the demand side and the supply side, it’s really striking how much the supply side—that is to say, education and training—has been relatively stable, whereas the behavior of the demand side—how employers hire and fire, who and how they train, and just everything about their HR behavior—has changed dramatically in the last 30 years.

If you’re looking for the main reason to change the labor market, all the data and the stylized facts should lead you to look at the demand side first. And if you look at the demand side first, you see some really striking things.

First of all, you see that employers have significantly changed their model with respect to hiring and training. Thirty years ago, maybe half of hiring was in some sense entry-level hiring—hiring people out of high school, out of college, out of Ph.D. programs, whatever it was. The expectation was that the companies would train the new hires and they would learn generalized work skills, as well as the specific skills that companies need on the job.

But if you look at 2014, although we don’t have great data on this, Wharton professor Peter Cappelli has noted that entry-level hiring accounted for just 6 percent of all new hires in 2012—much lower—and that much more of hiring now is for experienced workers with very specific education and experience profiles.

When you’re looking at entry level hiring, it’s much easier to find poaching from other companies. Then on top of that, when employers look for these sorts of specific profiles, they tend to characterize them, like in a job description, in terms of their specific education and employment history.

The requirements for a four-year college degree, in particular, are rising dramatically. Burning Glass, a data analytics company in the labor market, showed that only about 20 percent of administrative assistants in this country have college degrees, but that two-thirds of the new job postings for administrative assistants require a bachelor’s degree. In other words, about 80 percent of existing administrative assistants can’t apply for two-thirds of the new jobs in their own field.

If you think about it, the way this “credential creep”  moved through many parts of the labor market, it might connect the dots to the fact that we have low voluntary quits. Voluntary job mobility is down by 23 percent since 2001. And of course that’s partly cyclical, but it’s much lower now than at a similar point in past cycles. And it’s because a lot of people are stuck. They can’t move, based on the way that employers have increasingly depended on these kind of backward-looking heuristics. That’s an example of the demand-side behavior that really stops people from making progress.

In addition, when you look at the demand behavior over the business cycle by employers, it’s a really big difference. In the first five recessions after World War II, U.S. employers only laid off about one-third of the workers they would have needed to lay off to fully offset the drop in demand for their products or services. In other words, two-thirds of their workforce, in the aggregate, was absorbed by what economists would call labor hoarding, but what a CEO would now call “missing quarterly earnings targets,” right? This happens so consistently in the post-World War II period that economists called it Okun’s Law [after macro economist Arthur Okun].

But employers don’t do [much of] that anymore; their behavior started to change in the early ’80s. It went to 50/50 in that recession in the early ’80s, then to 25/75—the other way—in the early ’90s. And in the last two recessions, U.S. employers laid off 100 percent of the workforce that was needed to offset the demand drop. In other words, there was no more labor hoarding, profits were maintained, and layoffs for workers absorbed the entire demand drop.

Okun’s “Law” has been repealed, but only in the United States. In the United Kingdom, employers are still laying off one-third, two-thirds; Okun’s Law is alive and well there. In Germany, employers have moved in the other direction and they had almost no layoffs in the last recession.

So, ten million people can get laid off all at once and employers still maintain the hiring heuristic that, well, if you’ve been laid off for a while, then you’re a riskier hire. We have lots of evidence that if you are unemployed—well, if you’re unemployed, period, but particularly if you’re unemployed for over six months—you’re somewhere between half as likely and a quarter as likely to get an interview, even when you have identical education and work experience as someone who currently has a job.

When you add up all of those factors—how employers hire, how much they fire, how they train, who they train—the data on internal employer training is not so great, so we don’t know exactly what’s going on. But we do know that training matters a lot. We know that employers, for example, spend probably something like 20 times as much as the federal government does on training.

We can estimate that on a per-worker basis, training expenditures have dropped by about 30 percent in the last 20 years or so. Although it’s harder to quantify, there’s a lot of evidence that the pattern of expenditure on training has shifted towards the middle and the top of the occupation and wage stack in companies, and most of the cutbacks in training expenditures are at the lower end, or frontline workers.

Typically, if you’re a frontline worker (e.g. working in a retail store, a factory, a warehouse, or a call center, for example) and no one’s reporting to you, then you’re probably just being trained for safety, compliance, and efficiency. You’re not being trained like higher-income workers who are being trained for job progression and cross-training, developing their human capital in ways that would allow them to contribute more and to earn more over time.

There’s tremendous bifurcation now in the labor market. It’s driven more from the demand side and it really flows back into the supply side of the market.

We need to look at the demand side harder, however it’s not at all to say that there isn’t a lot of improvement that’s needed in higher education and job training and K-12 education and the like; there really is. But when you look at job training and at the parts of higher education where the implicit or explicit promise to the student is that they’ll be able to earn a higher wage, get a better job, the fact that the demand side is so misaligned makes it very difficult to change the supply side.

To put it another way, we say there’s a skills gap and that we want to train a bunch of people for skills. But the first five steps of the six-step hiring process are not about skills, rather they are actually about pedigree and history. Even if you train someone to have those skills, you don’t have a time machine, so you can’t go back in time and change their history or pedigree. All you can change is their skills. Until we have a labor market where people can get hired based exclusively on their skills, abilities, readiness, independent of how they got there, then the labor market is going to continue to keep a lot of people stuck, shut a lot of people out, and ultimately a lot of people will drift off.

As a result, you get lower labor force participation, lower voluntary mobility, and less wage growth. When people are able to go find a better job (to work at something, and then to earn more as a result) that’s where half of wage growth comes from, not just sticking in your role and getting an occasional cost-of-living increase.

HB: So there are two things that I want to hit on specifically. First, I just want you to connect the dots for me about what you said—how employers look for resumes, which is about what workers have done, and not competencies, which is what workers can do. I believe that’s exactly what you were just speaking to, so I just want to make sure I’m getting the lingo and how you’re thinking about it correct.

But second, one thing that I think is very interesting is how this looks different up and down the skills ladder. You talked about how there are fewer openings for entry-level positions and that there’s less training at the bottom and still more training at the top. Could you say more about how the demand side is driving that across the ladder? Is it that employers don’t think that folks at the bottom are trainable? Or is it that they don’t feel that those jobs need much training? Could some of this be that jobs are shifting so much that the ones at the bottom are being so deskilled that that’s a shift employers are making? Or is it tied up with other kinds of demand-side issues? 

So a two-part question. Take them in whichever order you would like.

BA: I’ll take the first question first—this observation that employers look for resumes instead of competencies.

Any competent employer will tell you, “No, we’re looking for competencies. We want people who can really do the job.” But if you break down their hiring process, you’ll find that competencies and sort of demonstrating what you can do often make up the last step or perhaps the last two steps in the hiring process.

The smart businesses will look for competencies. But again, they’ll do that with a handful of people that are finalists for the position, right? That might have started with several hundred or several thousand people sending in their resumes for that position and others coming through references and the like.

Companies need a way to screen, in the sense that it would not be cost effective for them to evaluate the competencies of 3,000 different people, on their own, through their existing processes. They narrow it down by keyword algorithms on resumes, so most of those resumes are never seen or evaluated by a human being.

They’re screened on job-applicant tracking software that’s looking for certain keywords associated with that job. And they are screened based on educational qualifications. Jobs get defined as, “this job requires a four-year degree,” or “this job requires specific years of work experience in specific roles,” and the like.

Unfortunately, this process often leaves out somebody who has not walked this sort of straight path where they had a good high school education, then went to college, graduated from college, or perhaps from a community college in a very in-demand, well-structured program with good employer ties.

There are a few ways to getting a job that work, but the ways that work more straightforwardly represent about half of our labor market, give or take. And for the other half, they’re going a more circuitous route.

There are 35-40 million Americans who went to college but never graduated. They don’t have that degree. On average, they make a little bit more than high school graduates, but their earnings are much closer to high school graduates than to bachelor’s degree graduates.

Then there are workers who have developed skills on the job but don’t have any credentials associated with it. They managed to stay at their company and their company is doing well. The people around them know that they can do that job. But if they ever want to apply for even the same job at another company, they’re very likely to be screened out by the educational requirements, which is another reason you see people not being able to move jobs and this huge decline in job mobility that’s been largely unexplained. If we start looking at some of those institutional factors and demand-side behaviors, we’re going to get a lot more of an explanation for why that is happening.

So consider the alternative. What if an employer, defined it in terms of “This is what we need you to be able to do to meet this standard in this context, and here’s how you can demonstrate it” instead of making a job description and the associated processes of hiring based on someone’s history and pedigree?

And what if there are a variety of ways you can demonstrate that you can do this now. In other words, if you can do the job, you can get the job. What if that were the norm and we built systems around that?

I’ve been working with this organization Opportunity@Work on the information technology occupations and trying to apply it there. Take coding or computer programming, for example. Today, if you want to know whether someone can code, you can look at their resume or you can look at their code. And there are standard repositories like GitHub that you can use.

So instead of using a software algorithm on someone’s resume, why not use a software algorithm to look at the quality of someone’s code?   That changes the nature of the demand signal.

And this is a very important point, because there are two big implications of changing that structure of the demand side of employment. The first is that there are millions of people today who can do more than they are allowed to do. In other words, you might be a bus driver and you’re running your church website, but you can’t get a job running a website for a company because you’re a bus driver. You might get a good reference from someone, but you wouldn’t get through the typical hiring process. And there are millions of people who could do more, earn more. They could fill those jobs already for which employers say they have trouble hiring.

So that’s one phenomenon. But that’s not enough. There are not enough of those people [who can do the job] to fill all the jobs that employers would characterize as a skills gap. But if you change that demand signal to be truly based on competency and ability and skill, then you change the business model for training which benefits those who don’t yet have the skills, but are capable of learning. Because today, if you train someone for a job and that person lacks the pedigree for the job, lacks the past history, the professional history, the educational history, that person is unlikely to get the job, even if you trained them.

Even if they have the ability, the underlying potential, and you train them well, they probably still can’t get the job. And as a result, it doesn’t make sense to train them. It’ll be a failed government program if the government pays for that training. It’ll be an unsustainable nonprofit if a nonprofit does that training. And it’ll be a failed business if a business does that training. And the individual will have wasted their time because they won’t actually get the job under today’s standard hiring heuristic.

But if, instead, a business had a robust hiring channel where you could get the job if you acquired the skills, then to train someone with the aptitude and the motivation for that job would be an excellent business investment, an excellent public investment, and an excellent investment of that person’s time.

So if you create that, then, that’s the second-order effect and it’s much larger, because there are many more people with the underlying potential to learn and to master a set of skills than there are people who already have those skills and can’t get the job.

That’s the second big wave. But then the third thing is, if that’s true, then everyone from entrepreneurs to social entrepreneurs to a creative kind of government can enable entirely new sorts of business models or policy approaches, but underpin the scaling of human capital acquisition, which I think is sort of the breakthrough.

But again, once you start understanding that this is a market, you understand that you actually have to change that initial demand signal first. For example, until there’s a sufficiently large market for a certain manufactured product, there’s no demand for enough factories to build it. And if there’s not enough demand for factories, then there’s not enough demand for machine tools for those factories. You see, it sort of goes back in the chain.

The labor market is an $8.5 trillion market in the United States and essentially the market in which investments in human capital realize their return, then you see that it flows back to all of our human capital kind of systems, which is a large part of our economy.

HB: So you say that the first step is to figure out the policy solutions. What do you think the first key policy steps are on the demand side to make that happen? What would you say the most urgent ones are—or are you guys there yet at Opportunity@Work?

BA: I think it’s a matter of both policy and practices, in the sense that not all of this can be solved by public policy. It has to be solved by employer practices, which public policy can enable, can incentivize, but can’t mandate at the level of specificity that would be necessary to still keep up with changes in the labor market.

The approach we’ve taken at Opportunity@Work is to really think about where the capabilities and mandates of government, business, the nonprofit sector, and these sort of technology platforms can be rewired, combined in different ways.

If you think about the problem we’re trying to solve, it is a market-based collective action problem. Hiring people, it’s not consumption for a company. It is an input to a complex and rapidly changing set of production processes meant to try to target a moving market, or set of moving markets. So it moves very quickly and government really can’t do market-based activities at that level.

On the other hand, the phenomenon we’re talking about on the demand side is really a collective action problem, because companies transactionally, individually, have a very strong incentive to poach an already experienced and trained worker instead of hiring a promising worker that they would have to train and give experience. But if they’re all poaching out the front door, then everybody’s being poached out the backdoor, and they’re not creating a new supply of people.

HB: Did you just make an argument for why the non-compete clauses that many workers are being forced to sign might actually be a good thing?

BA: No, I don’t believe these non-competes are a good thing. I don’t believe excessive requirements for licensure and so forth are a good thing. I think they’re all bad things.

I think they’re all part and parcel of a reality that much of our public policy—a lot of it at the state and local level—and many of our business practices really make it more difficult for people to find their path to the work that would give them the most satisfaction, that would produce the most value, and in which they could be most highly compensated in whatever mix of passion, freedom, and joy that reflects what they want.

So, no, I think they’re pretty much all bad, because there’s been a reduction in voluntary job mobility as a result of a lot of these things, including the licensure, the non-competes, and the like.

HB: But if we have a labor market where people are changing jobs a lot, isn’t there an upside to policies that might make it harder for people to switch, because it would create more incentives for businesses to invest in the talent that they have?

BA: It’s a logical argument on the face of it, but when you look at the data, you see it’s a myth that there’s some Millennial wanderlust and people just want to switch jobs more. They’re job-hopping more.

The reality is that businesses are treating workers more as a kind of sort of contingent workforce, whereas before, a much larger portion of businesses had a model where they thought of their employee base a little bit more like a long-term asset.

It’s not that people wouldn’t change jobs, but on average, businesses were investing as if they were going to keep people for a long time, to the point of accepting significantly lower profits during recessions so that they could hold on to two-thirds of the people they would otherwise have to lay off.

It’s businesses that stop doing that, right? Employers stop doing that.  The volatility in the labor market is driven much more by employers hiring up when demand goes up and then firing and laying off people quickly when demand drops.

That’s where the volatility is coming from, much more from the employer side than on the employee side. On the employee side, actually, the voluntary quits are lower at any given point in the business cycle than it used to be. And geographic mobility is much less; it’s half of what it was 30 years ago.

So in theory, what you’re asking is plausible. But when you look at the data, that’s not what’s going on. The volatility in people’s working lives is being driven much more by changes in employer behavior than by changes in individual worker preferences. And that has a lot of implications.

HB: Well, I think that’s all the time we have, but this has been very insightful and enormously helpful. Thank you so much, Byron.

BA: Thank you. I enjoyed it. Take care.