Labor Force Misalignment – A Unique Economic Factor
This is Part 12 of a multipart series, please see past posts for context – Part 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 and 11. Visit JharrisPHD.com for all past articles, biographical information, and photography portfolio.
When Demand for Labor Exceeds Supply
In early 2018, the number of total job openings exceeded the total number of unemployed persons in the United States as measured by the Bureau of Labor Statistics; as of Summer of 2019, this gap as swelled to over 1.625 million more jobs than the total number of seekers. As unemployment sits below 4%, the labor market is exceedingly tight in the United States right now. It is rare for an economy to operate with more job openings than qualified workers, in fact this occurrence has not appeared since before the year 2000. The reality is that many of the firms seeking workers cannot find them, and those who are left unemployed are not qualifying for the open positions. This is a natural result of several forces. First, the persistent growth in the domestic and global economy since the cessation of the Global Financial Crisis; second, the increased specialization of labor given technology; and third, the shifting demographics of an aging workforce. While the economy is still prone to cycles, the second and third trends are likely to persist for decades to come.
Skills Gap – A Worsening Problem
It is often noted that jobs are more likely to be outsourced to the past than to other countries or competitors; or simply stated, technology is the biggest single threat to any specific job title/function. Conversely, the largest sources of new job creation are often found in industries and for job titles that likely did not exist in the prior decades; thus, technology is also the biggest diver of job creation. The trouble lies in the level of skills and education of the new and unemployed workforce when matching with new job opportunities. As technological innovation and implementation accelerates, the skills gap, or difference between desired skills by employers and skills actually possessed by job seekers, will widen at a potentially alarming rate. This is likely the biggest cause of the 1.625 million job surplus in the US; further, those without market worthy skills are the most likely to drop out of the workforce prematurely and potentially permanently. To illustrate the point, consider that an increasing number of jobs require a college degree, this includes positions such as executive assistant which historically only required a high school equivalency. In the US, as of 2018 according to US Census Bureau data, 34% of adults aged 25 or older had a bachelor’s degree; this up from 26% in 2000 and 13% in 1973. While this trend towards a more educated populous is encouraging, research by Georgetown University found that 9 out of 10 jobs created during a 12-month period studied in 2018 went to those with a college education. In fact, there has been a substantial increase in jobs for those with college degrees since the end of the Great Recession while millions have been lost for those with just high school. Without a significant change in education or job training, this skills gap problem will get exceedingly worse.
Constraints to Growth and Expansion
Rising levels of unfilled jobs is toxic for the economy, as is having millions of Americans long-term unemployed. If a firm cannot hire, it cannot grow and expand its business. It cannot test new products, enter new markets, or otherwise fuel innovation and growth. As such, one reason many economists predict that long-run economic growth in the US will typically fall below 3%, even substantially, is labor shortages and hiring constraints. Further, shortage of qualified labor will drive up wages, which is good for the in-demand worker, but bad for firm profitability and price competitiveness. The net result is typically inflation which contracts the health and well-being of all and causes interest rates to rise which further constrains growth. Thus, the needs for robotic employees, artificial intelligence, and other forms of humanless automation are practical and not as opportunistic as one could be led to believe by media reports. The issue is not simply lack of skills but also lack of people; in the US the number of births fell by 2% from 2017 to 2018 as the number of births per female (the standard means of measuring native growth) fell to 1.72. Just to maintain the current population, 2.1 births per female are required as a “replacement” rate. While this next statement has unique political sensitivities, it is a mathematical certainty that the US cannot maintain its historic levels of long-term economic growth without continued, increased net immigration and/or an increased rate of live births. Given demographic trends and geo-political realities, neither are likely to occur in the next decade.
Geographic Realities of Workforce Dynamics
While national statistics are interesting to analyze, they obscure the reality felt in various cities and regions across the country. Superstar Cities (examples include New York City, Washington DC, Boston, Seattle, and Los Angeles) have workforces far more educated than the national average (Washington DC-Arlington-Alexandria MSA boasts 77.39% of adults with a college degree, more the double the 34% national average). Further these cities and regions attract young college graduates, technically skilled workers, and immigrants at much faster rates than other cities might (however many Secondary Cities and SubUrban markets are excelling in this dimension as this prior blog posts discusses). The result is that job growth, especially in highly paid fields, could be more and more geographically isolated in coming decades. Further, workers are increasingly less willing to relocate for new job opportunities; the result is firms are increasingly willing to relocate to where the talent is already living or wants to live. Workforce mobility and remote working trends only exacerbate this force (read this prior blog for details). Given that job growth is the fuel of real estate growth, the implications are significant.
Implications for Real Estate Investment and Development
The cities and regions most likely to demand more commercial real estate and housing are those that will experience the most job growth. This is likely to be in the above discussed Superstar Cities as well as the Rising Star cities like Austin, Orlando, and Nashville. The trend also bodes well for smaller suburban or micro-college towns like Ann Arbor, Michigan (the MSA with the most educated population, 92.57%), and Durham-Chapel Hill, NC (72.77% college degree attainment). There is also likely to be greater energy to those metros with technology and other STEM workers as those fields are most in-demand (Boston and San Francisco for examples). Interestingly, some metros with a historical basis in manufacturing and otherwise non-college educated type jobs are also beginning to reemerge due to growing bases of knowledge workers; examples in this category include Columbus, OH, Pittsburgh, PA, and even Detroit, MI. Real estate investors and developers should follow these trends as they could very much dictate growth patterns and thus future valuations. Further, those on the opposite end of the spectrum could see increasingly negative population growth and thus lower demand for all forms of real estate and thus lower valuations (in a recent study of Census data, the major US city with the largest one-year population drop by percentage was St. Louis, MO down -1.1% followed by Baltimore, MD -1.1% and Milwaukee, WI -0.7%).
Labor force trends have always been a main driver for demand of all forms of real estate. What is new for the coming decade is the degree to which the skills gap and aging population may force firms to more aggressively relocate to find talent. Prior generations relocated to find work, those graduating college in the 2010s and 2020s are increasingly picking cities to live in, then finding work. The Amazon HQ2 search process of 2017/2018 is a perfect example of this reality. Amazon knew it could not rely on finding enough talent in Seattle, so it aggressively shopped the nation for host cities and appeared to rank largely on number of tech/knowledge workers. The final selection of the Washington DC metro is not surprising given multiple factors including the highly educated workforce as described herein; they also, chose Nashville, a Rising Star city, for a major 5,000 employee hub. If real estate investors and developers want a real-life case study of how this trend is shaping the US, study all the ups and downs of the nationwide Amazon HQ2 hunt. While this search was loudly broadcast, many firms and their site selection consultants are repeating the process daily; expect future real estate valuations and demand measures to reflect the winners and losers of these beauty contests.