Malinvestment in Human Capital

November 26, 2011

by Jerry O’Driscoll

The Weekend Wall Street Journal has a front-page article on labor mismatch: “Help Wanted: In Unexpected Twist, Some Skilled Jobs Go Begging.” It focuses on the problems that the Union Pacific Railroad is experiencing trying to hire skilled workers to keep the trains rolling. These include electricians who work on diesel engines.

It is a widespread problem: the article reports survey results showing that 83 percent of manufacturers reported a moderate or severe shortage of skilled production workers. The shortages include such categories as machinists. Wages for skilled labor are rising, in some cases at double-digit rates.

Unskilled labor is complementary to skilled labor. If skilled labor cannot be hired, there is no demand for unskilled labor. Some firms report that the inability to hire needed workers is their greatest impediment to growing their business.

Malinvestment in labor markets is the counterpart to malinvestment in capital goods. Higher education is a bubble, and colleges churn out graduates with degrees that have no application in the workplace. Student borrowing to acquire such degrees is malinvestment in the same way that constructions loans to build homes in Las Vegas was malinvestment.

There is no mechanism by which lowering interest rates (“monetary stimulus”) or spending money on public workers (“fiscal stimulus”) is going to cure the problem. Labor mismatch is a  manifestation of a coordination failure, just as malinvestment in capital goods is a manifestation of a coordination failure. It is a microeconomic problem.

16 Responses to “Malinvestment in Human Capital”

  1. Jeff Says:

    u meant to say “there is *no* mechanism”

  2. Jim Rose Says:

    Roger Garrison wrote on delays in the reallocation of specialised labour somewhere in his writings.

    labour market search and matching and the mobility of specific human capital are important future areas for ABCT in explaining the depth of the bust.

  3. Don Lloyd Says:

    Low skilled workers with low wages make up an essential part of the demand for higher paid labor and higher skilled labor. Without the lower paid labor, the lower level of profitability may well mean that some firms cannot be sustained and a number of higher paid workers will become unemployed as their firms go out of business.

    Regards, Don Lloyd


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  5. Allan Walstad Says:

    For fun I googled “higher education bubble” and there’s a whole wikipedia article on it.

    American universities seem to have some attraction for foreign students. I’ve noticed an increasing number even at our backwater Pitt campus in Johnstown, PA. I wonder to what extent this constitutes a significant export, one which may forestall liquidation of the physical and human capital tied up in the overbuilt university system?

  6. Bill Stepp Says:

    This week’s Village Voice has a front page article on “Debt and Debtor.” NYU is no. 1 in student debt. Go Violets!
    The article profiles Lyndsey (no last name), who works two jobs and has $165k in student loans outstanding.

    The author writes: “In the clutches of the great recession, after the home-borrowing bubble burst, the education borrowing bubble lives on…. In some respects, NYU is the poster child for the excesses of 21st-century student debt in America.”

    I think the article is online.


  7. Over time, malinvestment in labor markets is partly ameliorated by geographic mobility, for which U.S. labor markets were once notable. But that labor flexibility no longer seems to be what it once was. With homes difficult to sell, employees locked into employer-based health plans, and unemployment benefits serially extended, the U.S. labor force is increasingly becoming immobile and “Europeanized,” as noted in an article on this subject in today’s Wall Street Journal (11/28/11, p. A2, “U.S. Job Market Shows Ills of Europe.”

  8. Troy Camplin Says:

    I have said this repeatedly, in a variety of places, with people constantly insisting I’m wrong — and often making it personal, since I’m an unallocated human resource myself, being an unemployed humanities Ph.D. (I don’t know why people have to attack you for making a valid point using yourself as an example, but that’s a separate issue.)

    We are in an ABCT-driven education bubble. Period. It is driven by artificially low interest rates for guaranteed student loans. The result? Just look at what happened in Egypt: http://www.popecenter.org/commentaries/article.html?id=2474

  9. Pietro M. Says:

    I just read cornuelle’s “reclaiming the american dream”. there is a chapter on the independent sector foundation which guaranteed student loans for poor students. and how it has been emptied by federal bureaucrats wanting to buy middle-class votes with federal outlays.

  10. Paul Lewis Says:

    There’s something very similar going on in the UK. We had a 50% target for the proportion of the school-leaving population attending university for most of the last decade, which all too often has led (perjorativly) to people doing mediocre degrees at poor universities. All too often, the graduates of such programmes end up discovering that – if they find a job at all – it does not fully exploit their ‘graduate-level’ skills. Worse still, the incease in the numbers going to university has led to a corresponding reluctance on the part of young people to take apprenticeships, which appeared to them to be a second-best option. The upshot, of course, has been a shortage of good skilled technicians, of the kind you mention in fields such as electrical, electronics, and mechanical engineering, high-intergrity welding, composites, etc.. I’m currently in the throes of visiting UK-based companies in the space, aerospace, nuclear, and composites industries, and a majority of the 50 or so firms I’ve visited so far report shoprtages of the kind of labour you mention.


  11. […] Capital is both heterogeneous and specific.  Human capital exhibits the same tendencies. […]


  12. The blame goes to the broad Left Wing and to their Academic supporters and benefactors. Lecture after lecture on spoke of Plato’s “philosopher kings” who put the craftsman above the slave and below the soldier.

    The agenda of the entire 30 years past has been about “knowledge workers” and the “post-industrial revolution” because factory work was considered something to rise above. Sow the wind, reap the whirlwind.

    Of course, the corporations did export jobs. Unfortunately, they apparently could not import electricians. Too bad we don’t have an influx of Indian and Chinese blue collar workers to meet the needs.

  13. vidya peri Says:

    With college tuitions increasing every year, there will be less graduates; hence more blue collar workers. But, again we need to keep in mind that it is the low wage paid jobs that sustain the high wage paid jobs as well. It is because of the lower paid employees that firms are able to sustain and maintain their higher paid employees. Though college degrees are a bubble and mostly have no application to their workplace, it is the experience that the employers are looking for most of the time.

  14. John Says:

    It’s a comment that is all too commonly heard. Local jobs require local experience and local experience can not be found.

    This leaves qualified people without the ability to obtain entry level roles. Too long a wait from graduation before finding an entry level role makes it ever harder to find said role and thus the complete waste of the money spent on student loans.


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