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Time to close the skills gap and revive US manufacturing

By Dr Suzanne Rosselet - January 2013

Four years ago, I wrote an article entitled "The Impact of President-Elect Obama on U.S.Competitiveness" to discuss the challenges of maintaining America's lead in world competitiveness. What has happened since then? The United States dropped out of its number one position in the IMD World Competitiveness Yearbook, mainly due to a dramatic slide in its Government Efficiency, falling from 5th place in 2002 to 22nd today. Similarly, the U.S. economy is suffering a relative decline in the WEF's Global Competitiveness Report, falling to 7th place from 1st in 2007. And if this wasn't worrying enough, a study published last year by Harvard Business School indicates that no fewer than 71% of respondents of a survey sent to nearly 10,000 HBS alumni expect U.S. competitiveness to decline over the next three years. Other indices sound varying degrees of alarm: In the Heritage Foundation's Freedom Index[1], the U.S. ranks tenth in the world in terms of economic freedom; in the World Bank's Doing Business Report[2], the U.S. ranks 4th in terms of the ease of doing business, including a dismal 68th place for the ease of paying taxes (no surprise for those who are brave enough to fill out their own tax returns!). And the Information Technology and Innovation Foundation (ITIF) highlights the fact that the U.S. now ranks 4th in innovative-based competitiveness (out of 38 economies), but falls second to last in the rate of progress since 2000, ahead of only Italy.[3]

Consequently, amid the many calls for a new "Sputnik moment", what should be the key focus of the new Obama administration for the next four years? Cutting corporate taxes, upgrading infrastructure, introducing more "business-friendly" regulation, restoring America's technological lead, improving the educational system and skills base, are all examples of Washington's urgent to-do list. But if during President Obama's New Year celebrations, he were to ask himself which of the above should be his biggest priority, I would suggest that investing in skills and education are the critical contributors to lifting U.S. competitiveness. This proposal was further supported during a recent IMD event, during which the U.S. Ambassador to Switzerland and Liechtenstein, Donald S. Beyer Jr., was asked what he believed to be the biggest challenge facing the Obama administration.  Beyer said education is likely a country's key competitive advantage. "The US needs to build the best human capital it can and develop the 'best and brightest', as well as improve physical infrastructure."

Why? Because the United States is currently in the midst of an historical manufacturing revival. Developing a long-term skills' strategy is vital to ensure that the U.S. can capitalize on this trend. What are the explanations behind this renewal? Mainly that outsourcing to low-cost countries is no longer as tempting with labor costs rising in many of these countries (the seductive "China Price" is slowly being eroded) and transportation has become more expensive due to higher oil prices. In addition, the U.S. will benefit from an enormous energy windfall thanks to shale gas, helping to make it one of the lowest-cost countries in terms of energy. If you add the benefits of higher quality manufactured goods and state-of-the-art innovation capabilities, the U.S. has a fair chance of regaining its historical leadership in advanced manufacturing.

Meeting the challenges of this "manufacturing revival", however, puts the onus on closing the skills gap via more and better-targeted investment in education and training. Due to the time lag involved in preparing tomorrow's skilled workforce, the question remains: "Will the U.S. miss the train?" President Obama has pledged to revitalize U.S. manufacturing, boost exports and create more jobs—an electoral promise critical in tackling America's historically high level of unemployment (7.7% in November 2012). A recent study by the Boston Consulting Group claims that the U.S. is on course to regain its status as a global industrial powerhouse, boosting goods exports and creating between 2.5 and 5 million jobs by the end of the decade. [4] Since American manufacturing has been in steady decline since the 1980s, this is news that could turn President Obama's New Year's resolutions into realistic opportunities, if he prepares the groundwork in time to put a halt to this decline. This means closing the skills gap to sustain any revival in manufacturing, whether it is American companies reshoring production back to the U.S. (e.g. GE, Ford, Caterpillar) or foreign companies attracted to a more cost-competitive United States (e.g. Toyota, Siemens). In today's globalized world, firms must take into account "total" costs along the entire supply chain, not only labor costs, but also the costs of holding inventories, transportation and energy costs, and the costs associated with how quickly a firm can respond to changes in demand in terms of lead times. The U.S. offers many of these advantages including access to one of the world's biggest markets.

Just one example, a manager from Boeing recently mentioned that the company was working round the clock to meet backlogged orders for planes, demand increasingly driven from overseas, but couldn't find enough skilled workers to meet the growing needs. This is a story we hear often at IMD: companies are struggling to keep up with demand, not because of a lack of capacity but due to an insufficient number of qualified workers. What can be done? Three recommendations were proposed in July 2012 by the President's Council of Advisors on Science and Technology[5]  to support advanced manufacturing. This multi-stakeholder council, made up of business leaders, academics and scientists, called on President Obama to make good on his promise to create an "economy built to last" by: a) enabling innovation, b) securing the talent pipeline, and c) improving the business climate. Just to focus on the second recommendation, that of building, attracting and retaining talent, the Council recommends an advertising campaign to promote manufacturing as an exciting career path, building on the skills of returning veterans, investing in more community colleges, creating partnerships between industry and these colleges, as well as promoting manufacturing fellowships and internships.

I would add re-focusing career choices towards high value-added, knowledge-intensive manufacturing, and educational curriculum towards the STEM branches of science, technology, engineering and mathematics. Supplement this with more technical training during or after high school, similar to the apprenticeship programs found in Switzerland and Germany, and ensuring that young people finish their education (less than 58% of students in the U.S. graduate on time at four-year colleges).[6] Lastly, improve the quality of U.S. high school education. Despite the fact that more than half of the world's 100 leading universities are American (and eight of the top ten), American high school graduates rank poorly in international test scores: in the OECD PISA rankings, American 15-year olds ranked 25th in mathematics, 17th in reading and 22nd in science (out of 34 countries). [7] No American President should sleep well with these results.

Since most experts acknowledge that advanced manufacturing is the best bet for creating high-paying jobs, with the additional advantages of contributing to innovation and reducing the U.S. trade deficit, President Obama would do well to heed the advice of his Council and set into motion the steps necessary to reverse the decline in U.S. manufacturing and technological leadership. Education and training are critical to provide an appropriately skilled workforce that will ensure long-term sustainable growth and restore the U.S. lead in competitiveness indices and other rankings. But more importantly than rankings, investing in the skills of the American people has got to be the overall objective of any U.S. administration and should be at the top of the list of President Obama's New Year's resolutions.  

Dr. Suzanne Rosselet is a Research Fellow at IMD specialized in world competitiveness. She holds a degree in economics from Stanford University and previously served as Deputy Director of IMD's World Competitiveness Yearbook. 

[1] 2012 Index of Economic Freedom, Heritage Foundation.
[2] Doing Business Report 2013, World Bank and IFC.
[3] Atlantic Century II – Benchmarking EU and U.S. Innovation and Competitiveness, Information Technology and Innovation Foundation (ITIF), July 2011.
[4] "Rising U.S. Exports—Plus Reshoring—Could Help Create up to 5 Million Jobs by 2020", Boston Consulting Group, September 21, 2012.
[5] "Report to the President on Capturing Domestic Competitive Advantage in Advanced Manufacturing", Executive Office of the President, President's Council of Advisors on Science and Technology, July 2012.
[6] U.S. Department of Education.
[7] Program for International Student Assessment (PISA), OECD, 2009.

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