BUSINESSWEEK ONLINE : APRIL 26, 1999 ISSUE
NEWS: ANALYSIS & COMMENTARY

The Economy's Rising Tide
Business takes up the challenge of training its rawest recruits

Lisa Jackson, a 25-year-old mother of two with a high school diploma, had never held a job before last spring. With the end of her welfare benefits looming, Jackson headed to a job fair near her New Carrollton (Md.) home and nabbed a position with a nearby Marriott hotel. When she showed up for work, Marriott immediately enrolled her in a six-week training class. ''I was very surprised,'' Jackson says, of the company's investment in her.

So, too, are employers. As the U.S. economy sprints into its ninth year of expansion, companies are hiring thousands of people like Lisa a month. Unemployment has fallen to 4.2%, its lowest level in 29 years and, some economists predict, could drop further. That leaves companies reaching deeper into untapped portions of the labor market to hire people who have never been employed, have been out of the workforce for years, or who lack basic skills.

DANGER SIGNAL? In short, says Diana D. Lewis, vice-president of human resources at Ecolab Inc., a $2.8 billion maker of cleaning products, ''You can't be that choosy.'' Indeed, 36% of job applicants failed some version of a basic-skills test last year, up from 19% just two years ago according to a survey released on Apr. 12 by the American Management Assn. Unemployment among adults over the age of 25 who lack a high school diploma dropped to 6% in March, from 7.5% in February. That's the lowest level since the Bureau of Labor Statistics began tracking this group in 1992. And Federal Reserve Board Chairman Alan Greenspan said in recent Congressional testimony: ''We're seeing, for the first time, significant absorption of a lot of the people who are not capable of getting on the lower rung of the ladder and work[ing] their way up.''

Historically, that has been a danger signal: As an economic expansion ages, productivity usually drops--precisely because companies are forced to hire workers who lack the proper skills. Or, they must pay higher wages to lure more qualified workers from other employers.

So far, this cycle is different. Even as the economy has roared ahead and unemployment has plunged, wage gains have remained tame. In fact, average hourly wages rose just 1.8% in March, down from almost 3% in early 1998, the Labor Dept. reported on Apr. 13. And productivity gains have been proceeding at a healthy 2% annual clip.

Part of the explanation is that workers, especially those in entering service industries, lack the bargaining power that unions provided in previous expansions. A more significant factor, however, is the continuing investment in capital equipment--in particular, in information technology--to make operations efficient. Companies ''are coming up with amazing tricks of technology to make unproductive workers much more productive,'' says Edward Yardeni, chief economist for Deutsche Bank Securities.

For this happy arrangement to continue, however, companies have to invest in human capital, too. To develop the talent they need to expand their businesses, companies need to turn today's recruits into productive workers--and taxpaying consumers. Without a substantial investment in training for the new work force, companies could face decreased productivity and increased turnover.

It's a huge job. Not only do companies have to train workers for entry-level positions, in this super-tight job market they have to think about how they can prepare some of these workers to advance to higher positions. That means not only helping the worker cope with the job but also with life in general. At Burger King (DEO), basic training for starting restaurant jobs now includes Life 101: teaching new employees how to balance a checkbook, for example, and the importance of getting to work on time.

Lisa Jackson's courses at Marriott, part of an eight-year-old training program, included classes on self-esteem and stress. ''It taught me a lot. It will help me long-term,'' says Jackson, now working in the hotel security office. Jackson also got help from the state of Maryland, which offered a state-subsidized child-care program that allowed Jackson to take the job. Says Amy Brown, a senior associate at MDRC, a social policy research firm in New York: ''There's a new sophistication about what needs to be done to prepare people for the labor market.''

There's also a bigger need to teach new workers more academic skills. Ecolab has started a training program at a Wisconsin plant to teach entry-level employees math, basic physics, and blueprint-reading skills. Why? In a state where the unemployment rate now stands at a viselike 3.4%, Ecolab has found it impossible to fill next-level jobs--which require the assembly of cleaning equipment--with new recruits.

Sometimes companies simply can't fill the skills gap. Cessna Aircraft Co., for example, is planning to hire 2,000 workers this year as demand for business jets soars. But the company is firing entry level employees--who start at $10.38 an hour--at an unusually high rate. ''One of the things we're finding is that kids have no idea what they're getting into,'' says Bill Quattlebaum, employment director for the Wichita company. ''[It's] manufacturing. It's hard work. It's hot.'' Cessna is addressing the issue with a task force to study how to lower turnover.

Then there are the job applicants who don't even make it past the door. Ecolab, for example, has been generally happy with its new partnerships with welfare-to-work community groups, but it also has had to get used to more frequent interview no-shows and drug-test failures. Able One's Moving Co., a 15-employee Cleveland firm, is so hungry for talent that it has hired workers with substance-abuse problems and then referred them to Alcoholics Anonymous. ''We can't compete with the big companies,'' says Vice-President Julie Ross.

Still, there is plenty of good news in this full-employment economy. Since 1993, 2 million people have come off welfare rolls--voluntarily or through welfare reform. And as they enter the workforce and succeed, these people are destroying old assumptions. Many employers are reporting higher retention rates than they expected among welfare-to-work employees. ''The old stereotypes of people on welfare not wanting to work are just not true,'' says Commerce Secretary William M. Daley, whose department now employs 4,400 former welfare recipients. Larry E. Healy, director of business partnerships at Electronic Data Systems, adds that his company is finding great potential among its welfare-to-work force. ''Just because someone is economically or educationally disadvantaged does not mean they're not smart, bright people,'' he says.

The question is what will happen to these workers when the economic engine slows. Despite the wage gains of the past three years, income inequality remains much higher than it was two decades ago, according to the BLS. And the forces keeping a lid on wages--globalization and technology--are not going away. So getting workers trained while the economy badly needs them is key--both for their own prospects and the economy, too.

By David Leonhardt in Chicago, with Laura Cohn in Washington and bureau reports

To read a letter to the editor about this story, click here.

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