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Mr. Recession, meet Mr. Labor Shortage

Not long ago, labor shortages were the big concern on Main Street. Has the recession changed that?

May 1, 2002


Ron Wirtz Editor, fedgazette
Mr. Recession, meet Mr. Labor Shortage

Time was when you could expect certain things from a recession, particularly when it came to workers. Business slows, unemployment shoots up, available labor expands across the board, and employers know they are in the driver's seat when (indeed, if) they need workers.

Take TMI Systems Design, a manufacturer of institutional furniture in Dickinson, N.D. "Our industry is not growing. ... We don't anticipate 2002 to be a year of growth," said Cal Kolling, company vice president of human resources. Having "right-sized" its operation by about 30 people, the company employs about 350, mostly in production and pre-engineering jobs. It recently began looking to hire a few additional workers and found "a number of good candidates" for entry-level and drafting positions.

Before the recession, TMI and most other employers in the Ninth District were staring into a deep and widespread labor shortage. TMI "had a standing order" for workers with job agencies, Kolling said. "There is a pretty dramatic difference [in the labor market] between then and now."

But Kolling and many others don't expect the relief to last very long. "If things do pick up in a year or so, we anticipate kind of the same labor situation we had a year or year and a half ago."

Momma, is this your recession?

At times this recession has played out as expected, bringing all-too-familiar hardship to thousands of laid-off workers and their employers. True to formula, unemployment has risen and the "frenzy" for labor, as one source put it, has slowed.

However, for a couple of basic reasons, this recession appears unlikely to upset employment and workers nearly as much as its predecessors. Early indications are that this will be a particularly mild recession. Equally important, the labor shortage is rooted in demographics and other slow-moving factors that pack a counter-punch of their own against this recession.

With unemployment still under 3 percent in Sioux Falls, S.D., "I really think this recession is not like any other recession," said Mary Madema, director of workforce development for the Sioux Falls Development Foundation. "There still is a labor shortage—while we've been in a recession—in all kinds of jobs."

Fred Schnook, head of the Northwest Wisconsin Workforce Investment Board and the Northwest Wisconsin Concentrated Employment Program, pointed out that area and national unemployment was much higher during the last two recessions. "Is it possible to be at full employment in a recession? We're getting close."

How much for the kid?

Almost without exception, the district was in the grips of a significant labor shortage before the onset of the national recession that, statistically speaking, started in March of last year.

At its most basic level, the labor shortage stems from the fact that job growth is outpacing population growth in all district states. Minnesota, Montana and Wisconsin are all projecting job growth of between 1.3 percent and 1.6 percent from 1998 to 2008. South Dakota is tops at almost 1.7 percent. Problem is, none of their populations is growing nearly so fast. North Dakota is on the low end of projected job growth at a little less than 1 percent annually through 2008. But the state's population grew less than 1 percent—total—in the last census count and is not expected to change appreciably in the coming years.

To meet staffing needs, employers have been luring all willing-and-able bodies into the workforce. In December 2000, only one metro region in the district (Great Falls, Mont.) had an unemployment rate of more than 4 percent-a rate well below what economists once considered full employment. Other regions looked like they were being pulled by a tractor beam to labor ground-zero: The La Crosse, Wis., area was at 2.7 percent; Twin Cities, 2.1 percent; Rapid City, S.D., 1.9 percent; Rochester, Minn., 1.8 percent; Fargo, ND, 1.7 percent; Sioux Falls, 1.4 percent.

Labor in every region of the district shared the prosperity. In Michigan's Upper Peninsula, a number of counties saw their unemployment nearly halved during the 1990s. Gogebic County, which borders the northwestern edge of Wisconsin, had its unemployment rate drop from 11.5 percent in 1996 to 6.3 percent in 2000. Houghton County at the top of the U.P. went from 9.7 percent in 1992 to 4.9 percent in 2000.

All across Main Street, the labor shortage became the prime focus. In St. Cloud, Minn., a 1999 survey of employers by the state university there found that 60 percent had more difficulty attracting qualified candidates compared with just three months earlier, and no firms reported that hiring was easier. A spring 2000 survey of job vacancies by the Minnesota Department of Economic Security (MDES) reported that 94 percent of openings in the Twin Cities were hard to fill. The estimated vacancy rate at the time was about 4 percent (about four job openings for every 100 jobs), which was nearly twice the local unemployment rate at the time.

Minnesota employers were hardly alone. A summer 1999 survey by the Montana Department of Labor and Industry found that about half of all employers had difficulties finding qualified employees often or very often. Less than 20 percent said they rarely or never had this problem. A survey of employers in the Bismarck-Mandan region of North Dakota last year found that two-thirds of 30 surveyed occupations were considered at least somewhat difficult to recruit for. Those with the greatest recruiting difficulty also tended to offer the highest wages. Half of the employers in a Fargo survey last year reported there were few or very few qualified candidates for job openings there, particularly for jobs that paid better than $10 an hour.

During the five years prior to the recession, businesses in northwestern Wisconsin were adding "lots of workers," according to Schnook. "In terms of employers' ability to find qualified workers for higher-skilled positions or any entry-level positions, those were a real problem" before the recession, particularly for tourism-based towns like Spooner and Bayfield.

A human resource manager for a Watertown, SD, manufacturer said that skilled labor was so tight before the recession, "I would have sold my children for a welder."

Chart-Umemployment Rate 2000-2001
Source: U.S. Bureau of Labor Statistics

Chart-Change in Nonfarm Employment December 2000 to December 2001
Source: U.S. Bureau of Labor Statistics

Thank goodness you're here, Mr. Recession

But if history is a valid barometer, one could expect the ensuing recession to treat the labor shortage like a tornado treats a stick house. And in some cases it has.

Unemployment in the district has gone up almost across the board. In the UP, it bounced up two full points to 8.4 percent during 2001. On the heels of losing more than 3,000 jobs in 2001, the 10-county northwest region of Wisconsin saw unemployment hit 8.5 percent in January, the highest since 1994. The statewide rate reached 5.8 percent in February, its highest since 1991. Half of Wisconsin counties have unemployment rates exceeding 7 percent, and three-quarters exceeded 6 percent, including the entire top-third of the state.

Among the district's metro regions, only Great Falls saw its unemployment drop from December 2000 to December 2001, although many had very small increases; Rapid City saw the biggest increase (1.7 percent) and Eau Claire, Wis., had the highest overall rate at 4.9 percent.

Minnesota's unemployment claims spiked by about one-half, or better than 100,000, to 312,000 claims last year, according to MDES. Claims were also fairly spread out. While the Twin Cities made up the bulk of new claims, every region in the state experienced at least a 10 percent increase in claims in 2001, and most saw increases of 20 percent to 75 percent.

Not surprisingly, job vacancies also dropped from 140,000 in the fourth quarter of 2000 to 80,000 one year later.

"At this point in time, a lot of fields don't have a [labor] shortage. ... There's a lot less unmet [worker] demand than there was a year ago," said Todd Graham, MDES regional analysis manager. At the end of 2000, Graham said, his human resource contacts complained "how hard it was to fill openings." One year later, Graham said, they were "thankful for that change [in labor conditions] and thrilled to see unemployed people applying for jobs" rather than incumbent workers hunting for greener grass.

In St. Cloud, "the local labor shortage is no longer a primary concern" among local employers, according to a quarterly business report there last summer. The number of firms expecting to add employees in the near future dropped by almost half over an earlier survey, and help-wanted ad linage in the local newspaper in late 2001 was down 57 percent from 1999 levels.

The La Crosse region's labor shortage started to ease in 2000, according to job vacancy surveys there by the state Department of Workforce Development (DWD). During the 12 months leading up to June 2001, the eight-county region in western Wisconsin saw job vacancies fall by about 1,000, or about 30 percent. A subsequent October survey indicated vacancies were falling further still.

Workers seem to be paying attention. In Sioux Falls, a February job fair saw a 20 percent rise in attendance among student job seekers, while the number of employers recruiting at the fair declined, according to Madema, from the Sioux Falls Development Foundation. "Fewer businesses are going on campuses to recruit and grads are aware that they have to work a little harder to get a job."

Expectations at the fair were "way different" than they were a just a year or two ago. In recent years, fully aware of the hiring demand, students were approaching prospective employers "and asking, 'What would you do for me if I came to work for you?'" Madema said. "Employers are back to holding some of the cards. Frankly, it's a more natural state."

Company reports of new hires (for both new and existing jobs) were down 15 percent in 2001 in South Dakota, according to its Department of Labor (DOL). Employers have told Madema that "all of the sudden turnover in the workplace is nil." When labor was particularly tight, companies were providing incentives to lure workers from other companies. "That dynamic changed" when the recession hit, Madema said. "Workers are more willing to stay, even if the recession is not affecting them. That's just the sensitivity of the working rank and file" to the recession.

Manufacturing pain

But most of the recession's ill effects, particularly concerning labor, were limited to certain parts of the district economy.

Manufacturing, for example, took the brunt of the layoff hammer. South Dakota manufacturers shed some 6,000 workers during 2001, according to state DOL figures. Without those losses, the state would have experienced an employment increase of almost 2,000 jobs last year.

Minnesota lost almost 28,000 jobs in manufacturing in 2001, easily outdistancing the next closest sectors of air transportation (7,400 layoffs) and personnel supply companies (6,600), according to Graham of MDES. Unemployment claims by laid-off manufacturing workers nearly doubled last year and made up almost half of the statewide increase in claims.

"The thing that really shows is every part of manufacturing has been affected," Graham said, ticking off job losses among makers of plastics, electronics, metals, printing and numerous other products. "They've all had big losses."

One source in southeastern Minnesota said a local electronic parts manufacturer had seen strong growth several years running. "They were hiring everyone they could get their hands on" in the area, employing close to 900 people at one point. That came to a "screeching halt" with the recession. The plant now employs fewer than 50 people "and the rumor mill is they are closing."

Wisconsin manufacturing has been particularly hard hit, losing about 34,000 jobs in 2001, according to preliminary state data. Despite growth in other sectors, the Eau Claire region shed about 1,600 manufacturing jobs from 1999 to 2001. La Crosse lost 400 to 700 manufacturing jobs in each of the last three years.

Layoffs or closings by three large manufacturers in the northwest region this year idled almost 400 workers there. "There's a heck of a lot more people looking for work," Schnook said. "The skill-available pool of labor is much higher."

Blink and you'll miss it

Even with the job losses in manufacturing, some regions"indeed, even states—in the district are showing little employment damage from the recession. For example, eight of the 14 district metropolitan areas saw total employment increase in 2001.

The recession's effect on the North Dakota labor market has been "nada," according to Nelse Grundvig, a research analyst with Job Service North Dakota. "We've been looking and waiting." The state's January unemployment rate went up a half-point from the previous month to 3.8 percent, but was still one of the lowest January rates on record. "There is virtually nothing [regarding state labor trends] that can't be explained with regards to seasonality," because the state typically sees a rise in unemployment early in the year.

"We've been insulated from the economy downturn. ... I'm not sure anyone has a reason why," Grundvig said. Part of it was likely due to industrial mix, including heavy equipment manufacturers, which along with the construction industry has stayed buoyant during the recession, he said. "They're not seeing any kind of downturn." The state's energy sector—coal mining, electricity production, oil and gas—is also doing well. "When you run the numbers, [business] has remained strong," Grundvig said.

As such, the labor shortage never went away, or if it did, it was simply trying to catch its breath. "Our labor shortage is still very real," said Dave MacIver, president of the Bismarck-Mandan Chamber of Commerce. Though the local unemployment rate has risen in the past year, it still stands at a gaudy 3.1 percent, according to the most recent statistics.

In Montana, "the recession has had a lot less effect on the labor shortage. We haven't had the same negative [employment] effects of the recession," said Wendy Keating, commissioner of the Montana Department of Labor and Industry. Nor has there been much difference among regions across the state, she said.

The state did experience some layoffs. One software firm in Bozeman cut 135 workers—"that's what we call a big layoff here," Keating said. But the state "does not have a lot of manufacturing and we don't have a lot of dot.coms. ... It was kind of like [the recession] never happened." Similar to its eastern neighbor, Keating said the state's economy "has been more affected by the energy issue than anything else."

Similarly, a few sectors of the economy appear to have missed the invitation to the recession altogether. The most obvious across the district is health care. "It's as if that sector is totally oblivious" to the recession, said Jay Mousa, MDES research and statistics director, at a February speech in the Twin Cities. While most major employment sectors saw vacancy rates plummet in 2001, the health care vacancy rate in Minnesota dropped just 15 percent, and health care had easily the largest number of total openings among industries, according to agency research. Demand for practitioners and technicians remained almost unchanged.

The health care industry in La Crosse "was short [of workers] and remains short," according to Bill Brockmiller, a regional labor market analyst with the Wisconsin DWD. The shortage reaches all fields within the industry, including nurses, technicians, dental hygienists and others. "Health care is not a cyclical demand factor item." Brockmiller said. "They never got any relief and they know they are not going to."

The construction sector-often a bellwether itself to the start and depth of a recession-has also remained strong in Sioux Falls and other regions. "They are not playing that [recession] game," said Madema. "Somebody forgot to tell those guys."

A labor boomerang

Although there are ample signs of a recovery, Graham from MDES said some Minnesota employers are being cautious when it comes to hiring. "Some companies want to recover before they staff up again."

If, and when, they do, they might feel a little labor déjà vu. Rather than eliminating the labor shortage, Schnook of northwestern Wisconsin said the recession provided "a small window of opportunity to get your human resources in order," adding that after recovery, the labor shortage "is going to be worse" than before the recession hit.

Despite a rising unemployment rate in northwestern Wisconsin, Schnook said his biggest concern is that small businesses—"the engine for growth in our area"—don't fully grasp the long-term nature of the labor shortage. They think, 'Thank God this is over,'" Schnook said. "The small mom-and-pop [business], some get it, some don't."

Those that do appear resigned to keep their nose to the labor grindstone. The Sarah Lee Bakery Group in Sioux Falls employs about 540 people, mostly blue collar. Unlike many other goods producers, the company has experienced no layoffs during the recession. "Our business has been pretty good,"said Dave Lein, human resource manager for the company.

But despite local layoffs, the labor market "for the last 18 months has been pretty tight. ... [Workers] are still pretty picky about the jobs they take," Lein said. "I don't think [the labor market] is going to get much tighter than it is. At least I hope not."

Brockmiller, the Wisconsin DWD analyst, said La Crosse employers have maybe seen some relief in entry-level positions, but added, "if there's been any relief, it's been very minute." Some manufacturers "think the labor shortage is over ... [but] astute employers-and most of them are-see this as a breather at best," he said. "I think all of this is very, very temporary."

The issue of labor shortages in the Ninth District is explored further in the July 2002 and the January 2005 fedgazette.

Ron Wirtz
Editor, fedgazette

Ron Wirtz is a Minneapolis Fed regional outreach director. Ron tracks current business conditions, with a focus on employment and wages, construction, real estate, consumer spending, and tourism. In this role, he networks with businesses in the Bank’s six-state region and gives frequent speeches on economic conditions. Follow him on Twitter @RonWirtz.