Skills for the 21st Century — Building Human Capital for Economic Mobility

By Ben Wilterdink, Director of Outreach and Policy Research at the Archbridge Institute

Believing that the next generation will generally do better than the current one is an often unspoken, but essential, piece of the American Dream. Arguably the best way to gauge the health of this part of the American Dream is to measure how much an individual earns compared to how much their parents earned at the same age. Economists call this absolute intergenerational economic mobility, and here, the United States could be doing better.

In a landmark study on economic mobility, a team of researchers working at the Equality of Opportunity Project led by Raj Chetty found that 90 percent of children born in 1940 earned more than their parents at the same age while only 50 percent of children born in the 1980s were able to do the same. Other research on rates of intergenerational economic mobility, however, paint a somewhat better picture. In the first installment of an economic mobility series published by the Archbridge Institute, Dr. Scott Winship examines contemporary rates of economic mobility in America using data from the Panel Study of Income Dynamics (PSID). While much of his research complements the Chetty et. al. study, Winship finds that after adjusting for changes in family size, accounting for government transfer payments, and using a different formula to measure inflation, about 68 percent of children born in the 1980s are earning more than their parents were at the same age. Despite some disagreements on the precise measurement of absolute intergenerational economic mobility, there is certainly room for improvement.

The Modern Labor Market

While there are many factors contributing to a less-than-ideal level of upward absolute economic mobility, one factor that looks increasingly important is that participants in the labor market have not been able to keep pace with the skill set required to succeed in an increasingly advanced and global economy. The labor market encountered by those born in the 1980s is vastly different than the one facing those joining it today. One study found millennials will likely hold four different jobs by the time they reach age 32. The same study noted that current workers were more likely than previous generations not just to switch jobs more often, but also to switch entire industries more often. These trends coincide with the increasing pressures of globalization and technological disruption that have dramatically changed the nature of work in a short period of time.

The transformative impact of technological change on the labor market is difficult to overstate. By far the biggest labor market disruptor appears to be automation. A 2015 report from Ball State University examined job losses in the U.S. manufacturing sector and found that only about 13 percent of the job losses could be attributed to trade with the rest resulting from productivity enhancing technological advancements. According to a 2015 paper published in the American Economic Review, between 1962 and 2005 the U.S. Steel industry experienced a 75 percent decline in its workforce (more than 400,000 people) without any corresponding loss in output.

Greater automation is also reflected in the change of the American workforce from agricultural workers and tangible goods producers to primarily service providers. According to data from the St. Louis Federal Reserve Bank, 38 percent of jobs in the U.S. in 1945 were goods-producing compared with just 14 percent in 2017.While this shift has been accompanied by a rising wage premium for highly skilled workers able to capture the productivity gains provided by capital investment in automation, it also produced a decline in job opportunities (particularly well-paying job opportunities) for unskilled or low-skill workers.

Simply put, moving from a goods-based economy to a service-based economy has been paired with a shift in the need for hard skills in the labor market toward a growing premium associated with soft skills. As automation quickly replaces jobs that are routine in nature, more job opportunities are now found in career paths that place increased value on soft skills.

The Growing Importance of Soft Skills

Broadly referring to interpersonal skills, communications skills, and social intelligence, soft skills are sometimes called non-cognitive skills, emotional skills, or non-academic skills. Loosely categorized as a broad set of skills, competencies, behaviors, attitudes, and personal qualities, soft skills enable people to effectively navigate their environment, work well with others, perform well, and achieve their goals. Economists James Heckman and Tim Kautz, of the University of Chicago, documented the importance of soft skills in a landmark 2012 paper, “Hard Evidence on Soft Skills.” That paper included a far-reaching survey of the literature around soft skills and found strong evidence that they were critically important predictors of future economic success.

Interestingly, recent evidence indicates that these soft skills may have even become a more important factor for success in the modern labor market than traditional hard skills (or cognitive skills). A 2014 National Bureau of Economic Research paper from Kautz, Heckman, and others found that “[Soft skills’] predictive power rivals that of cognitive skills.” Furthermore, a 2017 research paper examining the labor market in Sweden (often cited as one of the best performing nations in terms of economic mobility) from 1992 to 2013 found that “the labor market appears to increasingly value individuals possessing high non-cognitive relative to cognitive skills over time.” It is becoming increasingly clear that equipping workers with soft skills is the most effective pathway to their future success. That means ensuring that workers have the ability to develop and hone these skills is critical to ensuring more upward economic mobility.

But it is not just economists and academics that are placing the emphasis on soft skills, increasingly employers are becoming more vocal about the soft skills shortfall in the modern labor market. In a detailed 2014 paper for the National Bureau of Economic Research, University of Pennsylvania professor Peter Cappelli cites one survey of employers in which soft skills were of particular importance:

The Computer and Technology Industry Association (2012) produced an unusually detailed report, again based on a survey of employers, where 93 percent of employers responding said that they had a skills gap. Yet 90 percent also responded that they are at least “moderately close” to “where they want to be” with respect to skills, only 15 percent said that a factor in their skill problem was insufficient focus on STEM education, and only 20 percent reported that the problem was a limited pool of skilled IT workers, the essence of the STEM skill shortage argument. A large part of their perceived skill gaps had to do with “soft skills”- work ethic and motivation (almost 20 percent said that their concern was only soft skills, and about half reported that it was equally divided between “hard” and “soft skills”).

The Computer and Technology Industry Association survey is hardly an outlier when it comes to measures of what employers report are their challenges in finding qualified applicants to fill job openings. According to a more recent article in the Wall Street Journal:

A recent LinkedIn survey of 291 hiring managers found 58% say the lack of soft skills among job candidates is limiting their company’s productivity.

In a Wall Street Journal survey of nearly 900 executives [in 2015], 92% said soft skills were equally important or more important than technical skills. But 89% said they have a very or somewhat difficult time finding people with the requisite attributes. Many say it’s a problem spanning age groups and experience levels.

Furthermore, Bob Funk, Chairman, CEO and founder of Express Employment Professionals, one of the nation’s largest job agencies, sat down with William McGurn of the Wall Street Journal in September, 2017 to discuss the modern labor market and his experience spending more than 20 years finding people employment:

This experience gives Mr. Funk some definite — and timely — notions about getting ahead in today’s America. Like everyone else, he talks about education and skills. But what he means by these words may be a little different from how they are used in the Harvard Business Review.

Start with skills. Hard skills and experience, he says, are only half the equation, and not the important half. He shares a small brochure his company puts out summarizing a recent survey of employers. “So many people do not realize how important the soft skills are to unlocking job opportunity,” he says.

In order, the survey found the top five traits employers look for are as follows: attitude, work ethic/integrity, communication, culture fit, critical thinking.

While soft skills may be more difficult to measure than traditional hard skills, there is little doubt that they are of immense importance. In addition to being the most sought after skills from the perspective of employers, there is a growing body of evidence that suggests soft skills also lead to higher wages. Recent research from David Deming, a professor at Harvard’s Kennedy School, showed that over the past several decades, the labor market has been increasingly favoring social skills, particularly the ability to work well in teams. Specifically, Deming finds:

Between 1980 and 2012, jobs requiring high levels of social interaction grew by nearly 12 percentage points as a share of the U.S. labor force. Math-intensive but less social jobs — including many STEM occupations — shrank by 3.3 percentage points over the same period. Employment and wage growth were particularly strong for jobs requiring high levels of both math skill and social skills.

One particularly interesting finding was the evolution of jobs that were not math-intensive but were more social. This group ranked just behind the high-math, high-social jobs in both wage growth and job opportunities. Interestingly, Deming’s research also found that from 1980 to 2012, jobs requiring high social skills (regardless of math requirements) grew as a share of employment opportunities while jobs that did not require social skills shrank as a share of employment opportunities.

Building Soft Skills

While there is still much research to be done into how best to develop soft skills, it is clear that development begins in early childhood and continues through adolescence and early adulthood. Perhaps unsurprisingly, one of the best ways to develop the soft skills necessary for labor market success comes in the form of entry level employment. A 2015 report from USAID concludes, “Theoretical literature suggests that adolescence and young adulthood are optimal times to develop and reinforce these skills.” Additionally, a growing body of evidence suggests that actually working, or at least being in a workplace environment, is a key indicator of successful soft skill development. In a 2005 book based on a far reaching longitudinal study of 1,000 students, Working and Growing Up in America, University of Minnesota Sociologist Jeylan Mortimer concludes the following:

… high school students who work even as much as half-time are in fact better off in many ways than students who don’t have jobs at all. Having part-time jobs can increase confidence and time management skills, promote vocational exploration, and enhance subsequent academic success. The wider social circle of adults they meet through their jobs can also buffer strains at home, and some of what young people learn on the job — not least, responsibility and confidence — gives them an advantage in later work life.

Dr. Mortimer’s conclusions are consistent with more recent research as well. In a 2014 report for the Employment Policies Institute titled “The Lasting Benefits of Early Work Experience,” economists Charles Baum and Christopher Ruhm “find clear evidence that part-time work by young adults — both during senior year of high school, and during the summer months — translates to future career benefits that include higher hourly wages, increased annual earnings and less time spent out of work.” But the benefit doesn’t stop in high school, the report’s executive summary states:

Most importantly, the economists find that this career benefit of entry-level work persists in the long term: Young adults who graduated high school in the late 1970s and early 1980s and worked part-time during their senior year saw a career benefit 5–10 years after graduation — and the earnings differential still existed nearly 30 years later. … Drs. Ruhm and Baum demonstrate that these future career benefits are occurring specifically as a result of the career experience that’s gained in early work experience.

Bob Funk seems to summarize these findings rather succinctly, stating in no uncertain terms, “Those low-paying, entry-level jobs are good training for the soft skills you need for upward mobility.” This view has had many champions, ranging from Dirty Jobs host Mike Rowe to former CEO of CKE restaurants, which includes Carl’s Jr. and Hardees, Andy Puzder. While entry level employment experience is clearly one mechanism to develop and reinforce soft skills among teens and young adults, research suggests that crucial building blocks of soft skill development begin in early childhood.

Creating an environment in which early childhood equips kids with the basic soft skills necessary for success later in life is critically important, but will require some major adjustments to our current culture. As a number of economists. including James Heckman and David Deming, quantify the importance of soft skills, and particularly their role in economic success, psychologists are leading the way in identifying factors in early childhood development that lead to their acquisition.

In her much lauded book Grit: The Power of Passion and Perseverance, psychologist Angela Duckworth outlines the importance of childhood effort and resiliency in future academic and career success. But just as psychologists are converging on grit, resiliency, and character as the essential building blocks for successful soft skill development, the mechanisms by which children acquire these traits is under attack. Writing in Reason Magazine, Lenore Skenazy, President of the nonprofit Let Grow Foundation, and social psychologist Jonathan Haidt, issue a timely warning about the cost of our culture’s intense focus on childhood safety:

When we raise kids unaccustomed to facing anything on their own, including risk, failure, and hurt feelings, our society and even our economy are threatened. Yet modern child-rearing practices and laws seem all but designed to cultivate this lack of preparedness. There’s the fear that everything children see, do, eat, hear, and lick could hurt them. And there’s a newer belief that has been spreading through higher education that words and ideas themselves can be traumatizing.

According to Skenazy and Haidt, the unsupervised free play of children has been an early casualty of the excessive focus on safety. Experts recognize unsupervised free play as essential for early childhood development and, importantly, the groundwork for soft skill development. For example, Boston College psychology professor emeritus, Peter Gray, has documented the importance of free play in early childhood development. Skenazy and Haidt summarize his research on the importance of free play:

In free play, ideally with kids of mixed ages, the children decide what to do and how to do it. That’s teamwork, literally. The little kids desperately want to be like the bigger kids, so instead of bawling when they strike out during a sandlot baseball game, they work hard to hold themselves together. This is the foundation of maturity. …

Best of all, without adults intervening, the kids have to do all the problem solving for themselves, from deciding what game to play to making sure the teams are roughly equal. Then, when there’s an argument, they have to resolve it themselves. That’s a tough skill to learn, but the drive to continue playing motivates them to work things out. To get back to having fun, they first have to come up with a solution, so they do. This teaches them that they can disagree, hash it out, and — perhaps with some grumbling — move on. [Emphasis mine.]

Teamwork, problem solving, and motivation are the exact benchmarks often discussed in the context of soft skills necessary to succeed in the labor market. These skills begin to develop early in a child’s life and our current culture of excessive safety seems to grossly underestimate their importance and undermine their development.

Simply put, in order to preserve the American Dream, our culture and policies should recognize the importance of developing and sustaining soft skills. Whether it is by repealing policies that restrict entry level employment opportunities or reversing cultural norms that overemphasize childhood safety, the economic and social cost of ignoring these skills will be immense. Individuals need opportunities in their formative years to develop soft skills so that they have the most sought after skill set when they enter the labor market as adults. This will allow them to achieve higher earnings and increase absolute economic mobility as well.

Much of this post builds on research from the Archbridge Institute’s forthcoming report on Economic Mobility, Skill Formation, and the Minimum Wage.

The Archbridge Institute is a non-partisan, independent, 501(c)(3) public policy think tank. Our mission is to lift artificial and natural barriers to economic mobility, by producing and disseminating multidisciplinary academic and policy research, to empower individuals to thrive and strengthen civil society.