Radio Shack Sales Clerk Wanted; Physics PhD Helpful

Yesterday’s Washington Post ran a piece titled, “Policymakers Hail STEM Education as a Strong Foundation, Pushing Innovation.”  As I’ve warned before, reach for your Skeptic’s Hat whenever you see a politician, academic, industry-funded researcher, industry lobbyist, immigration attorney and the like use the word innovation in a STEM context.

This crowd (discreetly referred to as “policymakers, advocates and executives” in the article, to be referred to as “policymakers and allies,” PAs, below)  generally has some hidden agenda lurking—expanded work visa policy, increased funding for academia and so on.

My (skeptic’s) hat is off to the Post for warning the reader of trouble, right there in the lead sentence of the piece (though sadly, not in the headline).  A synopsis of the article is this imaginary conversation:

PAs:  There is a natiuonal STEM labor shortage.

naysayer academics:  No, just look at the numbers, e.g. the flat wages and the percentage of STEM degree holders not working in STEM.

PAs:  Yes, but a knowledge of STEM is helpful in many non-STEM jobs.

One can’t argue with that second statement by the PAs.  I know that my math background helps inform lots of things that I do in life that don’t seem outwardly mathematical.  But the title of my post here, “Radio Shack Sales Clerk Wanted; Physics PhD Helpful,” is meant to convey the fact that the PAs’ image of STEM degree holders happily applying their background in some non-STEM profession, in an economy-boosting manner, can be highly misleading.  On the contrary, the STEM-er in question may actually be quite unhappy in his/her job, and it may be an enormous waste of economic resources.

Actually, all of this is basically political rationalization on the PAs’ part.  In order to explain, I’ll first give you a brief history of the shortage shouting.  Later I’ll return to the issue of tragic waste of STEM resources.

The tech industry, led by the Information Technology Association of America (ITAA) began in 1997 by claiming a labor shortage in the computer science field, which they aimed to leverage an expansion by Congress of the yearly cap on new H-1B visas.  They began the by-now time-honored theme of “the solution is more computer science education in the long term, but more H-1Bs for now.”  The plan worked like a charm. President Clinton ordered the Department of Commerce to play ball with ITAA (I used to have a copy of an actual memo from him to this effect, now lost, sadly).  Sure enough, DOC then produced its own report, very similar to the ITAA’s (though, interestingly, pretty much recanted by DOC a couple of years later).  Congress then nearly doubled the H-1B cap in late 1998.

But the increase was temporary, and the industry wanted even more.  They realized that a bigger umbrella would serve as a more powerful lobbying tool, so they broadened their claim to STEM in general.  (I have the impression that it was the industry lobbyists who actually coined the STEM acronym, though I haven’t been able to confirm it.)   They had no trouble selling this claim to Congress, the press, and the populace, playing the Education Card (citing international test scores in STEM, etc.).

The ploy worked for a number of years, until researchers Lindsay Lowell and Hal Salzman decided to check whether the STEM-shortage emperor was clothed; they found that he was not.  None of the PAs’ claims really panned out.  More recently, the authors (joined by Daniel Kuehn), did a more detailed study, again finding that shortage claim was not supported by the data, and that the H-1B program was adversely impacting wages.  They found, for instance, the IT wages in 2013 were still at their 1998 level.  Recently the Census Bureau added to such research by announcing that most STEM graduates are in non-STEM jobs.

And even the Microsoft-funded Tony Carnevale of Georgetown University found that the unemployment rates for new computer science and information systems grads was shockingly high (about 9% and 14%, respectively), given the tech industry’s shortage claims.  As I’ve explained before, there is more to these rates than meets the eye—not everyone who has a CS degree is fit to be a programmer—but it certainly undercut the lobbyists’ claims.

What were the PAs to do?  Their quest for an expanded H-1B visa program (and a fast-track green card program for foreign STEM grad students at U.S. schools) depended crucially on their claims of a STEM labor shortage.  So they came up with the spin that we see in the Post article:   a STEM education is helpful in non-STEM professions:   In fact, if my memory is correct, it was Carnevale who first offered this explanation. The Post piece quotes university president Freeman Hrabowski, who supports H-1B expansion so strongly that he has discussed how to sell it to the American people, expressing the same view rationalizing the surplus of STEM degrees.  (I’ve written elsewhere why universities are so anxious to attract foreign students.  It’s much more than simply that many pay full freight.)

All this is of supreme importance.  Those of you who listened to yesterday’s broadcast of the Marketplace radio show, in which DOC chief Penny Pritzker said we have a STEM labor shortage, must have wondered how she could be so poorly-informed. Had the interviewer asked her how she reconciled her statement with the studies showing the contrary, I believe that at least part of her answer would have been that many STEM graduates work in non-STEM fields.

This theme was already common in government circles as of 2011, I found at an invitation-only research conference in 2011.  The attendees, about two dozen in number, included policymakers from relevant government agencies.  Many of these policymakers were high-level, key people.

The contrast was interesting:  Roughly speaking, the academic researchers had one point of view, that of being skeptical of a STEM labor shortage, while the government policymakers generally took the opposite position, that either we had a shortage or if not, then having a surplus was beneficial anyway.  I’d been researching the H-1B issue since 1993, and have been a political junkie since age 12, if not earlier.  But even I was not prepared for the stark difference between the two groups.  I was particularly struck by the comment of one of the attendees, who when challenged about his claim of a STEM shortage, frankly replied that he must implement what comes from “the top,” meaning the President.

(I urge you to read my report on the conference.  Some readers of this blog were present; if any of you saw things differently, please let me know, and I will post your comments here, anonymously.  I believe that my report is consistent with the official report.)

The attendees from government had already coined a new (somewhat Orwellian) term, diversion, for the STEM people in non-STEM jobs, and were trying to spin diversion as a good thing.  Quite a bit of the discussion was on this topic.

One government analyst, for instance, pointed to molecular biology PhDs now working on Wall Street, covering the biotech industry for investment firms.  The fact that this was a questionable return to the huge government and other investment in the education of these scientists didn’t bother him.

Another government researcher in attendance, a young woman not far out of her own engineering PhD work, claimed that many people with STEM PhDs really DON’T WANT to work in STEM.  Though I have no doubt she was sincere about her own case—I got the impression that she had pursued a PhD largely due to parental pressure—I don’t think her claim is generally true.  Most people don’t go through the huge time commitments, expense and opportunity costs of a PhD program unless they find their field to be captivating.  I submit that most “diversion” is involuntary (and that most of the “diverted” don’t even have a Wall Street salary to ease their sorrows and frustration).

In short, the “diversion” concept, and the STEM-helps-you-help-Radio-Shack notion, are rationalizations, formed to excuse what the PAs want:  expansion of the H-1B and green card programs, as we saw with Sec. Pritzker.

So there is indeed a human toll to having a STEM surplus, and as mentioned, a terrible waste of precious resources.

What Do You (Falsely) Take for Granted Regarding U.S. Outsourcing?

The loss of manufacturing from the U.S. costs American jobs but at least brings big cost savings to American consumers, right?  And anyway, the U.S. is too advanced an economy to do its own manufacturing, right?  Well, not so fast.  That first assumption is false in most cases, and the second is questionable.

What prompted me to devote this evening’s blog post to this topic is an article, “The Human Toll of Offshoring,” that ran in the New York Times on Labor Day.  It in turn was triggered by a new book, Factory Man: How One Furniture Maker Battled Offshoring, Stayed Local, and Helped Save an American Town, by Beth Macy, a longtime reporter for the Roanoke (VA) Times.  An alert reader of this blog called my attention to the NYT article, though I had heard Macy interviewed on NPR a few weeks ago.

Sadly, even the NYT buys into myth that offshoring brings U.S. consumers big cost savings.  Generally, this is not the case.  The typical profit margin for manufactured goods is so small that the savings in labor costs accrued from offshoring make a big difference proportionally to the manufacturer, but the difference in consumer price is small, as the labor costs are a small portion of the overall cost.  More generally, labor cost savings don’t bring big reductions in retail price.  For instance, my UC Davis colleague Phil Martin, an agricultural economist, once calculated that consumers save about a nickel per head of lettuce grown with unauthorized-immigrant labor.  Negligible savings for the consumer, but the growers win big.  Labor is a small part of retail price even in some service industries; Card and Krueger, writing in support of raising the minimum wage, found that a 19% increase in labor costs led to only a 2% rise in fast-food prices.

Of course, the politicians’ and unions’ favorite boogey man in such discussions is China.  Yet an investment analyst estimated that Chinese labor forms only 2-5% of the retail price of an iPhone.  I’ve seen other similar analyses.  A 2011 analysis by the Boston Consulting Group (BCG) stated that “…labor accounts for a small portion of a product’s manufacturing costs.”  Since the NYT article is about the furniture industry, note that the profit margin in that industry is said to be 2%.  If one combines this fact with the BCG statement, one sees that the savings to consumers is very small.  Again, remember that it is the manufacturer who wins from offshoring, not the consumer.

Significantly, a BCG survey found that Americans are willing to pay considerable premiums for products made in the U.S.  In fact, the amount they are willing to pay extra actually exceeds the small savings they actually get from offshoring.  Apple is moving some of its Mac production back onshore, presumably at least in part from this consideration.  BCG claims that this is a coming trend, as does The Economist.

So, the economics professor cited in the NYT article (requoted from the Macy book, and endorsed by the NYT reporter) seems to be rather off base in his statement:  “In reality, we shouldn’t be making bedroom furniture anymore in the United States. Shouldn’t we instead be trying to educate these workers’ kids to get them into high-skilled jobs and away from what’s basically an archaic industry?”  Moreover, his apparent attitude that all Americans should get an education and pursue one of the professions is of course absurd on its face, and  frankly, is amazingly naive.  Should more Americans go into the science research field, for example?  No, they can’t get jobs as it is, as a National Institutes of Health study found a couple of years ago.

Moreover, the NIH stated that foreign-worker programs were part of the problem.  Importation of foreign labor is just like offshoring, really; whether cheap labor is used abroad or brought to the U.S., the losers are U.S. citizen and permanent resident workers.  UC Berkeley economics professor Clair Brown and her coauthors have found that the H-1B work visa program negatively impacts American engineers, and the congressionally commissioned NRC report found that H-1B was adversely impacting IT wages.  (See references on NIH, Brown and the NRC in my Migration Letters paper.)

Apologists for offshoring, such as the NYT’s Tom Friedman, try to excuse all this not only by the old “the labor costs savings are passed on to the consumer” canard, but also by saying that the workers abroad will be enabled to afford American products, thus creating U.S. jobs.  That is true to some extent, but the benefit is probably not as great as the loss.  Friedman, for instance, has noted that software development work offshored to India is compensated by the fact that the Indian software “factories” use Carrier brand air conditioners.  But the extra Carrier sales arising from this are probably not going to result in Carrier hiring more engineers; the engineering is largely a fixed cost.  So, we are losing engineering jobs in this scenario but MAYBE gaining some manufacturing jobs (assuming those are not in India, which would be counter to Carrier’s best interests)–not a very good trade, is it?

Is the solution to place restrictions on globalization, in the form of imposing tariffs on goods and tightening policy on importing foreign labor?  As I’ve emphasized before, those questions should be for the American people to decide–based on full information, not on misleading NYT articles.