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The War of Words About The IT Labor Market

by Peter Capelli, PurpleSquirrel, September 2000

Purple Squirrel
September 2000

The IT Management Shortage


Dozens of studies have analyzed the state of the labor market for IT workers, and the results are easy to summarize. Researchers who study labor markets and representatives of IT employers disagree almost completely as to whether there is a shortage of IT workers. The researchers uniformly believe that there isn’t a shortage while the representatives vociferously believe that there is.

When parties are adamant about their positions and strongly disagree, it is often because they are actually talking about different things, and that is the case here as well. Economists use the word "shortage" only to refer to situations where markets and prices aren’t working to adjust supply and demand. Things can be very scarce and very expensive and yet not be in short supply. There is no shortage of diamonds, for example, because even though they are very expensive, you can buy all you want at the going price.

Industry representatives, in contrast, typically are looking at the problem not from the perspective of the market as a whole but from that of an individual employer. To them, a labor shortage refers to situations where individual employers cannot hire the workers they need at the price they are willing or able to pay. For these employers, the situation is a crisis. For the economists, on the other hand, this situation is just a tight labor market, one where labor is scarce and employers should either raise their wages or go into a different business.

Once we all agree to use the same language, then we can begin to make some progress. For employers, the problem is not really the entire IT market but the hot skills–the immediate and exploding demand for workers with highly focused skills that typically didn’t exist a few years ago. In the language of economics, the problem for them is the cost of adjusting to this very scarce labor: Wages jump quickly, raising havoc with compensation policies for other employees, and technology has not yet developed substitutes for the scarce skills, such as pre-packaged software.

So in the short run, employers have no choice but to try to hire the scarce workers. Bidding wars cause employees to hop from company to company, disrupting work flows in the process. By the time the supply of new workers comes along with the requisite skills, the particular innovation that caused the demand in the first place might already be gone. Even the most doctrinaire economist can recognize that these are real problems.

The question is what should be done about them. Here the economists are silent, and the industry representatives have a clear answer: Expand labor supply through immigration and increasing education opportunities. My own view is that neither is likely to work. At least as currently designed, the immigration programs do not respond well to short-term fluctuations in the demand for particular skills. The supply of students, much to the surprise of many industry representatives, has in fact been remarkably responsive to changes in demand and to the tight labor markets. The problem is the time lag between the time that students decide to pursue IT training and when they graduate and enter the labor market. Short of pushing students into IT majors regardless of the labor market conditions or dramatically shrinking the college experience, we can’t do much here.

Other alternatives better match supply and demand even for the hot skills in IT. They turn mainly on the management of the IT workforce. Especially given that the basic tasks are often very creative and the employees highly skilled, IT employees might just be the worst-managed people on the planet. Programmers in particular find that they are often managed at arm’s length as if they were independent contractors with jobs that are highly structured, isolated, and pressured. It’s no surprise that the majority of vacancies in programming come not from new jobs but from current programmers who leave the field altogether. Efforts that would keep them from quitting by making the work and the working environment more attractive would do a much better and faster job of addressing imbalances in supply and demand than adding workers to the labor force.

Similarly, the feeding frenzy to hire the best college grads, leading to tremendous bidding wars, while more experienced workers whose skills have fallen out of date are often unemployable, suggests another way to help address these imbalances. Retraining would go a long way toward helping to meet the short-term demands for skills. The fact that so little of it takes place inside companies has complex causes, and it would be a mistake to simply blame employers. It is an issue worth exploring, however, as a partial solution to the problem.

What is distinctive about the IT labor market over the long term is its volatility. We have gone from tight labor markets in the 1980s to an apparent glut in the early 1990s back to tight labor markets. Specific skill sets have gone from red-hot to obsolete even quicker. This volatility is likely to continue. Public policy that would try to keep up with or, worse, predict rapidly changing skill demand and then try to adjust supply accordingly, always with a time lag, would almost certainly make the situation worse.

The glut of IT workers in the early 1990s came about in part because tight labor markets in the late 1980s pulled so many new workers in. Instead, the best solutions are likely to come from inside firms through better approaches to management that make better use of the workers we already have. This might not be the easiest approach for the industry–it is far simpler to point to public policy–but it is an approach that is likely to work. PS

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at the Wharton School of the University of Pennsylvania. You may contact him via e-mail at cappelli@wharton.upenn.edu.