Current Events

The Skills Gap and Federal Reserve Rates

Written by Grovo

When President Obama launched his TechHire program last week, he took a moment to praise a few private-sector companies for launching community initiatives of their own. The president characterized one of them, a project that Grovo is helping create and deliver, as being in the best interest of businesses. “Companies like Capital One are going to help recruit, train, and employ more new tech workers, not out of charity but because it’s a smart business decision.”

He might be right in a totally different way than intended. Not only does the digital skills gap impair companies’ abilities to hire qualified employees, but in the unique aftermath of the Great Recession, it also has the potential to chill financial markets. Here’s how.

The Federal Reserve’s question

In December 2008, just three months removed from the financial crash that announced the Great Recession, the Federal Reserve set interest rates extremely low—almost to zero. Their goal was to combat the shock of the crash and the recession by stimulating spending. That meant making borrowing almost free via the Federal Funds rate.

Seven years later, the rate is still sitting within the same target range of 0% to 0.25%. Meanwhile, the economy has come a long way. Wall Street recently celebrated the sixth anniversary since the start of a rising market, a historic rally aided by the Fed’s cheap money. Unemployment is down to 5.5%. By some measures, the party is back in full swing. But the job of the Federal Reserve isn’t to get on the dance floor; it’s to “take away the punch bowl just as the party gets going.” In other words, if the economy gets too strong, the Fed is going to raise rates and tighten everything up.

The only reason they’re waiting, by many accounts, is to see how the employment situation is shaking out. And despite a very nice unemployment rate, many feel that the real employment situation is less sunny. The jobs that have been created since the recession, while numerous, aren’t paying very well. Wages have barely risen since this time last year, and wages in general have been flatlining for years. A wage growth of 2% says to many economists that the economy is not as strong as it may seem. The question is whether the Fed will agree with that line of logic, or whether they feel that wage growth—and thus consumer purchasing power—is strong enough to withstand a tightening.

Enter the skills gap

One factor that could affect the Fed’s decision is the skills gap. In other words, what if the economy is plenty strong, but wages aren’t growing well enough because the high-paying jobs that would lead to real growth in that metric aren’t being filled? What if the skills gap is holding down wage growth altogether?

Economists are split on the question. Some believe that wages should eventually start to rise given fallen unemployment. Others argue that the workforce doesn’t “deserve” a raise due to low productivity growth. After all, productivity fell during the fourth quarter of 2015. “Given the poor progress of labor productivity in recent years, averaging around just 1% per year, and stubbornly low inflation, the current rate of wage growth actually looks in line with fundamentals,” said Wells Fargo economist John Silvia.


Negative productivity growth, eh? Productivity is supposed to spike in the wake of a recession, and it hasn’t. Instead, it’s grown under 1.5% per year since then. That is positively anemic growth. Could it be due to something outside of this economic boom/bust cycle? Could it be the dreaded digital skills gap that we keep talking about? Of course something that takes 21% of a workday’s productivity would have a similar effect on the economy as a whole.

If workers were better trained in the skills needed for the multitudes of middle-skill jobs available right now, then maybe the job sectors with the highest employment gains wouldn’t be hospitality and retail: low-paying occupations with unstable prospects. Maybe wages would be higher, to compensate the highly sought-after skills. Maybe the economy would be bigger.

In short, the Fed has to dig into the skills gap in the coming months. If they determine that there are reasons aside from the economy’s fundamentals that are keeping wages down, then they may decide that waiting for any movement on wage growth will be futile. In that case, they would likely raise rates for the first time in the better part of a decade. If they conclude the opposite, that it isn’t just a skills gap holding back better wages, then they could keep money cheap and easy to come by for even longer, to give the economy a chance to strengthen more.

There are voices on both sides of the debate, but one thing is for sure. Whatever determination they make, it will have reverberations around the global economy. As people who study the digital skills gap often, it’s interesting to see the issue take something of a starring role in one of the year’s biggest economic dramas.

Want to learn more?