an economy doing half its job

8/11/2019 An Economy Doing Half Its Job

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Michael E. Porter Jan W. Rivkin

with contributions from Joseph B. Fuller, Allen S. Grossman,Rosabeth Moss Kanter, and Kevin W. Sharer

SEPTEMBER 2014

Findings of Harvard Business Schools2013 14 Survey on U.S. Competitiveness

AN ECONOMYDOING HALF ITS JOB


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EXECUTIVE SUMMARY 2

A PIVOTAL MOMENT 3

THE 2013 14 SURVEY 5

THE U.S. BUSINESS ENVIRONMENT IN 2013 14 6

K 12 EDUCATION AND THE ROLE OF BUSINESS 14

WORKFORCE SKILLS 21

TRANSPORTATION INFRASTRUCTURE 27

PATHS FORWARD 32

APPENDIX: METHODOLOGY AND RESPONDENT PROFILE 34

HARVARD BUSINESS SCHOOL SURVEY ON U.S. COMPETITIVENESS 1


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2

EXECUTIVE SUMMARYIn 201314, Harvard Business School (HBS) conductedits third alumni survey on U.S. competitiveness. Ourreport on the ndings focuses on a troubling divergencein the American economy: large and midsize rmshave rallied strongly from the Great Recession, andhighly skilled individuals are prospering. But middle-and working-class citizens are struggling, as aresmall businesses. We argue that such a divergence isunsustainable, explore its root causes, and examineactions that might mitigate it. We ask in particular, howcan we create a U.S. economy in which rms both thrivein global competition and lift the living standards of theaverage American?

Four patterns that shed light on this question emergedfrom survey respondents assessments of the U.S.

business environment: In gauging the future of U.S. competitiveness, the

survey respondents were pessimistic on balance.By a ratio of three to two, those who foresawa decline in U.S. competitiveness in the nextthree years outnumbered those who predicted animprovement. Reecting the divergence describedabove, respondents were much more hopeful aboutthe future competitive success of Americas rmsthan they were about the future pay of Americasworkers.

Though pessimistic overall, respondents were less

negative about the future of U.S. competitivenessthan they were in prior surveys. This trend seemsto reect the cyclical rebound of the U.S. economy.Accordingly, respondents were more favorablethis year in their assessments of every element ofthe U.S. business environment. Respondents sawrelatively small gains, however, in areas that posesome of the nations toughest challenges, includingAmericas tax code, its K12 education system, itspolitical system, and its regulations.

Overall, respondents saw weaknesses in thoseaspects of the U.S. business environment that

drive the prospects of middle- and working-classcitizensfor instance, the education system, thequality of workplace skills, and the effectivenessof the political system. And they saw strengthsin aspects that inuence company success, suchas the quality of management, the vibrancy ofcapital markets, and rm access to innovation. Thisdichotomy is likely at the root of the divergencedescribed above.

Compared to the typical respondent, alumni workingin small businesses had more negative (or lesspositive) views of virtually every aspect of the U.S.business environment. This nding echoes growingevidence from other sources that small businessesare disadvantaged in America.

Beyond a general assessment of the U.S. businessenvironment, the survey explored three areas of concernwhere smarter approaches might improve the prospectsof the average American: the K12 education system,workplace skills, and transportation infrastructure. Ineach of these areas, this report draws not only from thesurvey but also from wider HBS research efforts.

In K12 education , we found that business leadersare already engaged in many generous partnerships

to support students and schools. However, businessis mostly involved in fragmented, subscale effortsthat alleviate weaknesses in the education systemwithout strengthening the system for the long run.Fortunately, a number of new initiatives pointtoward better ways for business leaders to work witheducators to improve U.S. education.

Similarly, in the arena of workplace skills , we foundthat businesses are already involved in an arrayof internal and collaborative efforts to developskills. But we also uncovered tendencies in rmsto hire in ways that discourage skills investments;

poor information ows along the supply chainfor talent; and inadequate collaboration amongcompanies, educational institutions, andgovernment.

In transportation infrastructure , we found a hostof promising individual projects but no nationalstrategy for increasing both the nations mobility andthe opportunity that accompanies mobility.

Cutting across these three areas, we see a need forbusiness leaders to actto move from an opportunisticpatchwork of projects toward strategic, collaborativeefforts that make the average American productive

enough to command higher wages even in competitiveglobal labor markets. Without such actions, the U.S.economy will continue to do only half its job, withmany citizens struggling. And in the long run, Americanbusiness will suffer from an inadequate workforce, apopulation of depleted consumers, and large blocs ofanti-business voters. Businesses cannot thrive for longwhile their communities languish.


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A PIVOTAL MOMENTSince early 2008, the American economy has faceda succession of intense storms: the collapses of BearStearns and Lehman Brothers, the credit crunch, the

subprime mortgage crisis, the downgrading of U.S.government debt, the Great Recession, a brush withnational default, and a federal government shutdown.As we write, the economy is slowly recovering. Manybusiness leaders see smoother waters ahead, with thepromise of stronger and steadier growth in America. Thisgreater optimism is reected in the survey ndings wereport below.

But oddly, the recovery makes this a decisive moment,and potentially a dangerous one. Will we as a society nowsigh in relief and continue business as usual, grateful forcalmer waters? Or will we seize the opportunity to repairthe structural weaknesses in our economy that the stormsrevealed and that, arguably, brought on recent troublesand may bring them on again?

This choice emerges starkly from a careful look at U.S.competitiveness. The United States is competitive tothe extent that rms operating here can (1) competesuccessfully in the global economy while also (2)supporting high and rising living standards for theaverage American. The nations trajectories on those twogoals point in very different directions.

A focus on the rst goal alone could lead us simply todeclare success. After all, corporate prots in America areat an all-time high, and the Dow Jones Industrial Averagecontinues to hit new records. With wages now rising inemerging economies and energy costs falling in the U.S.,some manufacturing and other activities are returning toAmerica. Americas technology sector is booming again,and total initial public offering proceeds in 2013 reachedlevels not seen since 2000. Particularly compared toother advanced economies, America seems to have thewind at its back.

Yet on the second goalhigh and rising living standards

for the average Americanany thoughtful look at thedata reveals reasons for deep concern. The U.S. economyhas structural weaknesses that show up in a host ofdisturbing, long-run trends. In the lower and middlestrata of the income distribution, household incomeshave remained stagnant in real terms for decades.Long-run growth rates in private-sector jobs startedfalling from historical levels around 2000 and remainlow. The meager job creation that has occurred has been

overwhelmingly in local industries, not those facinginternational competition. Labor force participation inAmerica peaked in 1997 and has now fallen to levels not

seen in three decades. Real hourly wages have stalledeven among college-educated Americans; only those withadvanced degrees have seen gains. Notably, all of thesetrends began well before the Great Recession. They arestructural, not cyclical.

Our sense that the American economy is doing only halfits job is amplied by the recent business cycle, with itsjobless, low-wage recovery. After the recession that beganin late 2007, real gross domestic product recovered topre-downturn levels in three and a half years, but it tookthree more years (until May 2014) for the number ofjobs in America to return to its prior peak. During thosesix and a half years of net-zero job creation, the U.S.population grew by roughly 15 million. A recent reportfrom the National Employment Law Project nds that

jobs lost during the 200810 employment contractionwere disproportionately in higher-wage industries suchas construction and electronics manufacturing, whilejobs gained during the recovery have been concentratedin low-wage industries such as food service and nursinghome care. 1 Tellingly, all of the low-wage industrieswith job gains were local in character, not exposed tointernational competition.

The recent divergence of outcomes, with rms (especiallylarger rms) thriving and workers struggling, is unusual inthe United States. Historically, American companies andcitizens have tended either to thrive together, as in theboom after World War II, or to suffer together, as duringthe Great Depression. The survey results we report belowshed some light on the roots of this divergence.

1National Employment Law Project, The Low-Wage Recovery: IndustryEmployment and Wages Four Years into the Recovery, April 2014.

THE RECOVERY MAKES THIS A DECISIVEMOMENT AND POTENTIALLY A DANGEROUS ONE.WILL WE AS A SOCIETY NOW SIGH IN RELIEFAND CONTINUE BUSINESS AS USUAL? OR WILLWE SEIZE THE OPPORTUNITY TO REPAIR THE

STRUCTURAL WEAKNESSES IN OUR ECONOMY?


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Shortsighted executives may be satised with anAmerican economy whose rms win in global marketswithout lifting U.S. living standards. But any leader witha long view understands that business has a profoundstake in the prosperity of the average American. Thrivingcitizens become more productive employees, more

willing consumers, and stronger supporters of pro-business policies. Struggling citizens are disgruntled atwork, frugal at the cash register, and anti-business at theballot box. We agree strongly with this view: businessescannot succeed for long while their communitieslanguish.

Indeed, those business leaders with a long view see notonly hard-pressed citizens but also signs of trouble forcompanies. Yes, some rms are trying to bring businessactivity back to the United States. But once here, theyoften struggle to nd the skilled labor, the reasonablecosts of doing business, and the physical infrastructurethey need. Entrepreneurship is growing in parts of thetechnology sector, but small business as a whole is ashrinking portion of the American economy. Moreover,the rate of formation of new rms has declined in everyU.S. state during the past three decades. 2

Confronting a mix of positive and negative economicsignals, policymakers and business leaders alike face atough task. To make wise choices about how to bolsterU.S. competitiveness, they need an accurate andnuanced view of the structural strengths and weaknessesof the U.S. economy. Developing such a view has been

a central goal of Harvard Business Schools project onU.S. competitiveness, a multi-faculty effort launched inMarch 2011. A key tool toward achieving that goal hasbeen a series of surveys of HBS alumni, who work on thefront lines of all parts of the global economy. This reportshares the ndings of the third HBS alumni survey onU.S. competitiveness.

2Ian Hathaway and Robert E. Litan, Declining Business Dynamism inthe United States: A Look at States and Metros, Economic Studies atBrookings , May 2014.

ANY LEADER WITH A LONG VIEWUNDERSTANDS THAT BUSINESS HAS APROFOUND STAKE IN THE PROSPERITYOF THE AVERAGE AMERICAN.


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Like the 2011 and 2012 surveys, the 201314 surveyasked HBS alumni to assess the state and trajectory ofU.S. competitiveness and to evaluate elements of the

business environment that prior research has shown tobe drivers of national competitiveness. Posing the samebattery of questions each year allows us to track howimpressions of U.S. competitiveness have changed overtime.

The 201314 survey also explored three specicelements of the business environment in depth:

the education system through high school (K 12);

the skills base of the workforce; and

the nations transportation infrastructure.

We chose to focus on those elements for several reasons.First, prior surveys and previous work identied each ofthese areas as a signicant weakness or deterioratingstrength in America. Second, a deeper understandingof each area may help to explain the central concernwe described earlierwhy the average Americansliving standard has stagnated even as U.S.-based rmssucceed in global markets. Weaknesses in education orskills, for instance, could contribute to this divergenceby making it difcult for U.S. workers to compete withpeers around the world and thereby justify a higher livingstandard.

Third, each of the three elements is an arena in whichbusiness leaders have already taken actions to bolsterU.S. competitiveness but can do much more. From itsinception, the HBS project on U.S. competitivenesshas focused on the ways that business leaders canmake America more competitive. While much of thepublic discourse on U.S. competitiveness emphasizesthe important role of government, our distinctive focushas been on the potential contributions of business.By supporting schools, training workers, or promotinginvestments in infrastructure, how can business leadersmake the U.S. more competitive? Indeed, what arebusiness leaders already doing in these arenas?

Fourth, HBS faculty members involved in the U.S.competitiveness project have signicant research effortsunder way in each of the three focal areas. The surveyndings provide unique insights for those efforts.

It is important to keep in mind the timing of the surveysince events at the time could inuence responses. Thesurvey was administered in December 2013 and January2014. Two events seem especially pertinent:

In a year marked by a government shutdown andgridlock, Congress ended 2013 on a high note.Just before Congress went into recess for the

year-end holidays, members of the House andSenate averted a budget crisis and staved off thethreat of sequestration for two years. Instead ofbrinkmanship and uncompromising positions, theyreached an agreement on a bipartisan budget dealby focusing on common ground. As described in thenext section, this seemed to inuence respondentsassessment of the health of Americas politicalsystem.

Early in December 2013, the Program forInternational Student Assessment (PISA) announcedthe 2012 global rankings in which Americanteenagers continued to lag students in otheradvanced countries in math, reading, and science.The media attention given to the PISA results couldhave inuenced some respondents diagnosis of thestate of public education in America.

An appendix describes the survey, our methodology, andthe respondents in greater depth. The rest of this reportpresents our ndings on the U.S. business environment,K 12 education, worker skills, and transportationinfrastructure.

Alumni respondents were solicited with the help ofAbt SRBI, a leading survey research rm, via an e-mailmessage to alumni of Harvard Business Schools MBA,doctoral, and longer executive education programs.Prior survey efforts contacted all alumni, but thisyear, to guard against survey fatigue, we soliciteda representative sample of all alumni15,099individuals. Of these, 1,947 (12.9%) completed thesurvey. Respondents weighed in from 46 U.S. states(66.7% of respondents with known locations) and 72other countries (33.3%). They ranged in age from 26 to98, and the 75.6% who currently work came from everysector of the economy, with heavy representation in thenance and insurance, manufacturing, professional,scientic, technical, and information sectors. Amongthe respondents who are currently working, just over40% reported a title of chief executive, chair, president,founder, owner, managing director, managing partner, ora similar title at the very top of an organization.

THE 2013 14 SURVEY


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In each alumni survey, we gauge the overall trajectory ofU.S. competitiveness by asking two questions that reectthe denition of competitiveness. In three years, willrms in the U.S. be more or less able to compete in theglobal economy? And in three years, will rms be more orless able to pay high wages and benets?

In the 201314 survey, 47% of respondents expectedU.S. competitiveness to deteriorate, with rms less ableto compete, less able to pay well, or both (red boxes inFigure 1; numbers in red boxes do not sum to precisely47% due to rounding). A smaller portion, 33%, wasoptimistic, anticipating one or both dimensions of U.S.

competitiveness to improve and neither to decline (greenboxes). The remaining 20% were neutral, expecting nochange from current conditions on either dimension(yellow box).

Respondents expect the prospects of U.S. rms andworkers to continue to diverge. Respondents wererelatively bullish on the future of rms, with 31%expecting them to be better able to compete in globalmarkets in three years and 26% expecting them to beless able. (See the right and left columns of Figure 1,respectively.) In contrast, 41% foresaw lower wages andbenets, and only 27% anticipated higher wages andbenets. (See the top and bottom rows, respectively.Numbers in the top row do not sum to precisely 41%due to rounding.)

FIGURE 1: U.S. COMPETITIVENESS IN THREE YEARS (201314 FINDINGS)

18%

8%

8%

5%

1%

15%

5%

20%LESS

MORE

LESSNEITHER LESS

NOR MORE MORE

20%

Will firms in the U.S. be more or less able tocompete in the global economy?

Will firms in the U.S.be more or less ableto pay high wagesand benefits?

NEITHER LESSNOR MORE

Red, or fallingcompetitiveness:47% in total

Green, or risingcompetitiveness:33% in total

Percentages in boxes may not sum to total because of rounding.

THE U.S. BUSINESS ENVIRONMENT IN 2013 14

Pessimism Abating


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In 201314 as in past years, those who saw U.S.competitiveness as waning outnumbered those whosaw it as rising. But the overall level of pessimismhas declined over time. For instance, the portion ofrespondents who expect U.S. competitiveness to declinein coming years fell from 71% in the 2011 survey to47% in 201314. (See Figure 2.) One interpretation isthat the typical respondent sees U.S. competitiveness asdeclining but doing so more slowly than in therecent past.

Pessimism about the trajectory of U.S. competitivenesshas abated across respondents in all age groups, inboth U.S. and non-U.S. locations, and in every industrywith a large number of completed surveys. Between the2011 and 2012 surveys, the reduction in pessimismwe observed was concentrated especially in the subsetof respondents with liberal political views. In contrast,liberal and conservative respondents expressed a roughlyequal decline in pessimism between the 2012 and201314 surveys. 3

3The political leanings of respondents were inferred from policypreferences they expressed when completing the 2012 survey.Respondents who approved of the Buffett rule to place a minimumtax rate on high earners and disapproved of the Paul Ryan tax planand budget proposal were deemed to be liberal. Respondents with theopposite preferences were considered to be conservative.

71%58%

47%

13%17%

20%

16%25%

33%

2011 2012 201314

Survey date

RISINGCOMPETITIVENESS

FALLINGCOMPETITIVENESS

STABLECOMPETITIVENESS

P e r c e n t o f r e s p o n d e n t s

FIGURE 2: U.S. COMPETITIVENESS IN THREE YEARS, ACROSS THREE ALUMNI SURVEYS


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A Recovering Business EnvironmentRising condence in America was also evident when weasked respondents to compare the overall U.S. businessenvironment to that of other advanced economiesand that of emerging economies. Figure 3 contrastsresponses in 2011 and 201314. Across the board, therelative assessment of the U.S. business environmentimproved. Especially striking is the shift in trajectoryversus emerging economies: the portion of respondentswho perceived the United States as falling behindemerging economies fell from 66% in 2011 to 38%in 201314. This may, of course, reect the well-publicized slowdown in emerging economies as much asprogress in America.

To develop a more granular view of the U.S. businessenvironment, we asked respondents to assess individualelements of the environment that prior research hasshown to be drivers of competitiveness. The sidebar onpage 9 describes the elements we examined. Note thatin the 201314 survey, we added a new element forconsideration: the quality of health care relative to cost.Health care is a major driver of workforce well-being andproductivity in all countries, and especially in America, itis a large and growing cost of doing business.

Figure 4 summarizes the assessments in our originalalumni survey, in 2011. The horizontal axis captures thecurrent position of each element: it records the portionof respondents assessing each element in the United

States to be better than in other advanced economies,minus the portion assessing each to be worse. Thevertical axis summarizes trajectory: the portion feelingthat the United States is gaining versus other advancedeconomies on each element, minus the portion feelingthat the nation is falling behind. In 2011, respondents

saw great strengths in the U.S.for instance, strongentrepreneurship and innovation, world-class researchuniversities, high-quality management, and vibrantcapital markets. They also noted historical strengths indecline, including infrastructure and workforce skills,as well as worsening weaknesses, including Americaspolitical system, tax code, K12 education system, andmacroeconomic policies.

Figure 5 on page 10 shows subsequent shifts inassessments in the 2012 and 201314 surveys. Theposition and trajectory of every element improvedbetween 2011 and 201314. To some extent, weattribute this movement to generalized sentiment aboutthe United States and other economies rather than realchange. It is implausible, for instance, that the actualstate of Americas logistics infrastructure relative toEuropes or Japans changed much in two to three years.

Nonetheless, the relative movements are revealing. Mostimproved from 2011 were Americas macroeconomicpolicies and capital markets. This probably reectsAmericas comparatively rapid post-crisis stabilizationand a return to normal conditions in its credit markets,

FIGURE 3: ASSESSMENT OF THE OVERALL U.S. BUSINESS ENVIRONMENT

0%

20%

40%

60%

80%

100%

P e r c e n t o f r e s p o n d e n t s SOMEWHAT

BETTER

ABOUTAVERAGE

MUCHBETTER

SOMEWHATWORSE

KEEPINGPACE

FALLINGBEHIND

KEEPINGPACE

FALLING

BEHIND

PULLINGAHEAD

DONT KNOW

FALLINGBEHIND

SOMEWHATBETTER

ABOUTAVERAGE

SOMEWHATWORSE

KEEPINGPACE

PULLINGAHEAD

FALLINGBEHIND

MUCHBETTER

PULLINGAHEAD

KEEPINGPACE

PULLINGAHEAD

DONT KNOWDONT KNOW

MUCHWORSE

Current positionvs. other

ad vanc ed economies

Trajectoryvs. other

adv ance d economies

Trajectoryvs.

e me rg ing economies

201 1 2013-14 2011 2013-14 2011 2013-14


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MACRO ELEMENTS

ELEMENTS OF THE NATIONAL BUSINESS ENVIRONMENT

MICRO ELEMENTS

Macroeconomic policy: soundness of governmentbudgetary, interest rate, and monetary policies

Effectiveness of the political system: ability of thegovernment to pass effective laws

Protection of physical and intellectual property rights andlack of corruption

Efciency of legal framework: modest legal costs; swiftadjudication

Complexity of the national tax code

Education system through high school: universal access tohigh-quality education; curricula that prepare students

for productive work

Context for entrepreneurship: availability of capital forhigh-quality ideas; ease of setting up new businesses;lack of stigma for failure

Availability of skilled labor

Flexibility in hiring and ring of workers

Innovation infrastructure: high-quality scientic researchinstitutions; availability of scientists and engineers

Regulation: effective and predictable regulations withoutunnecessary burden on rms

Strength of clusters: geographic concentrations of relatedrms, suppliers, service providers, and supportinginstitutions with effective collaboration

Quality of capital markets: ease of rm access toappropriate capital; capital allocated to most protableinvestments

Sophistication of rm management and operations: use of sophisticated strategies, operating practices,management structures, and analytical techniques

Quality of health care relative to cost

Logistics infrastructure: high-quality highways, railroads,ports, and air transport

Communications infrastructure: high-quality and widelyavailable telephony, Internet, and data access

High-quality universities with strong linkages to theprivate sector

FIGURE 4: ASSESSMENTS OF ELEMENTS OF THE U.S. BUSINESS ENVIRONMENT IN 2011

LOGISTICS INFRASTRUCTURE

COMMUNICATIONSINFRASTRUCTURE

TAX CODE

K12 EDUCATION SYSTEM

UNIVERSITIES

ENTREPRENEURSHIP

SKILLED LABOR

HIRING AND FIRING

INNOVATION

REGULATION

CLUSTERS CAPITAL MARKETS

MACRO POLICY

POLITICAL SYSTEM

PROPERTY RIGHTS

LEGAL FRAMEWORK

FIRM MANAGEMENT

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

-60% -40% -20% 0% 20% 40% 60% 80% 100%

U . S . t r a

j e c t o r y c o m p a r e d t o o t h e r a d v a

n c e d e c o n o m i e s

Current U.S. position compared to other advanced economies

Strength and Improving

Weakness and Deteriorating Strength but Deteriorating

Weakness but Improving


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FIGURE 5: SHIFTS IN ASSESSMENTS OF ELEMENTS OF THE U.S. BUSINESS ENVIRONMENT

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

-60% -40% -20% 0% 20% 40% 60% 80% 100%

U . S . t

r a j e c t o r y c o m p a r e d t o o t h e r a d v a



2011 2012 2013-14






TAX CODE

K12 EDUCATION SYSTEM

UNIVERSITIES

ENTREPRENEURSHIP

SKILLEDLABOR

HIRING AND FIRING

INNOVATION

REGULATION

CLUSTERS CAPITAL MARKETS

MACRO POLICY

POLITICAL SYSTEM

PROPERTY RIGHTS

LEGALFRAMEWORK

FIRM MANAGEMENT

HEALTH CARE(ONLY 2013)

contrasted to lingering doubts about the banking systemsof Europe and Japan. Least improved were Americas taxcode and system of property rights, followed by its K12education system, its political system, and its regulatoryframework. These ndings point to some of the countrys

most stubborn long-term issues. Note also that healthcare debuted in the 201314 survey as a weakness thatis getting worse.

The survey responses were clearly sensitive to currentevents. On December 26, in the very middle of oursurveying period, President Obama signed into law abipartisan federal budget compromise that had beennegotiated by Democratic Senator Patty Murray andRepublican Congressman Paul Ryan. The compromiseeased automatic spending cuts and made a governmentshutdown less likely. Individuals who completed the201314 survey before December 26 assessed theeffectiveness of the U.S. political system as being

signicantly worse than did 2012 respondents.Individuals who responded after December 26 saw thepolitical system as much improved.

Figures 4 and 5 shed light on the diverging conditions ofworkers and rms in America. Workers and rms dependon quite different elements of the business environment.The economic fates of workers are bound up with thequality and scarcity of their human capital, whichparticularly in the middle classhas been eroded byweaknesses in the nations K12 education system andworkforce skills. Moreover, American workers cannotescape the consequences of a weak political systemor a convoluted tax code, for instance. In contrast, thesuccess of rms (and the highly educated professionalclass) depends not just on the human capital they cantap but also on the quality of American management,the vibrancy of U.S. capital markets, and accessto innovation and world-class research universities.Global mobility allows rms to offset a poor businessenvironment and break free from poor governmentpolicy, at least in the short run. In essence, workers arecaptives of the weakest aspects of the U.S. businessenvironment, while rms are beneciaries of Americasgreatest strengths.

WORKERS ARE CAPTIVES OF THEWEAKEST ASPECTS OF THE U.S. BUSINESSENVIRONMENT, WHILE FIRMS ARE THEBENEFICIARIES OF AMERICA'S GREATESTSTRENGTHS.


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Serious Concerns among SmallerBusinessesFor the rst time with the 201314 survey, we askedeach respondent who was working to specify the number

of employees in his or her rm. This allows us to uncoversignicant differences in how leaders of small and largebusinesses view America's business environment.

As Figure 6 reports, respondents working in small rmstended to be more pessimistic about the trajectory ofU.S. competitiveness than those from large rms. Atthe other end of the spectrum, respondents working forrelatively largebut not the largestrms, with 1,000to 9,999 employees, were the most likely to expect U.S.competitiveness to improve in the next three years.

Examining individual elements of the U.S. business

environment gives us a clearer view of small businessesconcerns. In Figure 7 (see page 12), we look at howrespondents in each rm-size class assessed the currentposition of each element of the business environment,compared to all survey respondents. A dark red boxappears when the respondents in a particular rm-sizeclass judged an aspect of the business environmentto be much weaker (by 10 or more points) than the

corresponding aspect in 201314 in Figure 5. Forinstance, respondents from companies with 10,000 ormore employees were more negative on the quality ofAmericas health care relative to its cost. At the otherextreme, dark green boxes signify that respondents in arm-size class are unusually positive or far less negative

on an element. For example, respondents from midsizedrms with 100 to 999 employees were not nearly asnegative on Americas regulatory conditions as was thetypical respondent.

Figure 7 reveals that respondents in the smallest rms,with one to nine employees, were more negative, orless positive, on virtually every element of Americasbusiness environment. The areas where the smallerbusinesses were especially pessimistic, or lessoptimistic, include the countrys education system,regulations, infrastructure, and tax code. In contrast,respondents in rms with 1,000 to 9,999 employeeswere more positive than average on almost all aspectsof the business environment. They were particularlymore sanguine about the political system and severalareas it affects, including macroeconomic policy, thetax code, and logistics infrastructure. Respondents frommidsized rms with 100 to 999 employees were nearlyas positive.

FIGURE 6: U.S. COMPETITIVENESS IN THREE YEARS, BY RESPONDENT'S FIRM SIZE

50% 47% 46% 45% 44%

17% 22% 22%18% 25%

32% 31% 32% 37% 31%

19employees

1099employees

100999employees

1,0009,999employees

10,000 or moreemployees

Firm Size

RISINGCOMPETITIVENESS

FALLINGCOMPETITIVENESS

STABLECOMPETITIVENESS


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The deep concerns among survey respondents in thesmallest rms echo broader, long-term evidence ofproblems facing Americas small businesses and newcompanies. Figure 8 shows, for instance, that growth intotal employment in small rms has not kept pace withgrowth in large rms in recent decades. And as Figure 9

reports, the number of companies dissolved in Americaeach year has crept up on, and now surpasses, thenumber of new rms founded in America. In 201415,the HBS project on U.S. competitiveness will focuson the challenges that small and new businesses facein America, via a study co-led by Karen Mills, formerhead of the Small Business Administration and now asenior fellow at Harvard Business School. This work hasbegun in the working paper "The State of Small Business

Lending: Credit Access During the Recovery and HowTechnology May Change the Game."

Overall, the survey ndings on the U.S. businessenvironment depict an economy that is on the mend ina cyclical sense and is faring better than some otheradvanced economies, but is not structurally equippedto do its full job: the prospects for broadly lifting livingstandards are dim, and smaller businesses, importantjob generators in the U.S. economy, are especiallydisadvantaged.

We turn next to three elements of the U.S. businessenvironment that are key to any long-term improvementin the economic future of the average American.

Number of employees

K-12 education

Communications infrastructure

Macroeconomic policy

Regulation

Health care

Innovation

Logistics infrastructure

Tax code

Universities

Political system

Entrepreneurship

Capital markets

Clusters

Hiring and firing

Legal framework

Property rightsSkilled labor

Firm management

- - - + +++ +++ - -

- - - ++ + -

- - - ++ +++ +++

- - - +++ ++ +

- - + + ++ - - -

- - + ++ + +

- - + ++ +++ - -

- - ++ ++ +++ -

- - ++ ++ +

- - +++ +++ -

- + + + +

- + + + +

- + ++ + -

- ++ - - ++ ++

- ++ ++ ++ -

- ++ ++ ++ ++- +++ ++ ++ +

+ + - - +

19 1099 1009991,0009,999

10,000or more

- - - - - - + ++

Compared to the average respondent as shown in Figure 5 in 201314, respondents in thisfirm-size class placed this element:

10 or more pointsto the left

5 to 10 pointsto the left

0 to 5 pointsto the left

0 to 5 pointsto the right

5 to 10 pointsto the right

+++10 or more points

to the right

FIGURE 7: RELATIVE ASSESSMENTS OF ELEMENTS OF THE U.S. BUSINESS ENVIRONMENT, BY RESPONDENT'S FIRM SI


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14

The challenge that Americas education system posesto U.S. competitiveness has been obscured by a lackof long-run information on student performance thatis comparable across countries. Last fall, however,the Organisation for Economic Co-operation andDevelopment (OECD) released new data that make itpossible to see the issue in a fresh light. For the rsttime, the OECD evaluated the workplace competenciesof adultsin literacy, numeracy, and problem-solvingskillsby age and country. 4 The data allow us to

examine adult competencies in successive age cohortswithin a country and thereby get a sense of how well acountrys education and training systems have performedover long periods.

Figure 10 shows the OECD results for literacy, witha measure of prociency on the vertical axis. Theblue columns show that younger U.S. workers havebetter literacy skills than older workers. This reects,presumably, an education system that is making progressin absolute terms. The challenge to America, however,is that the green columns, representing the internationalaverage, have progressed much faster than the bluecolumns. America has among the most literate 55- to65-year-olds in the world, but the same is not true ofyounger cohorts.

Figure 11 shows that America faces similar challengesin problem-solving and numeracy skills. What were onceAmerican advantages in human capital have turned intodisadvantages. Relative performance matters in globalcompetition, where American workers must out-produceand out-innovate the worlds best.

Some would argue (and we would agree) that Figures10 and 11 reveal an ethical issue: our society isnot fullling its promise to children to educate andprepare them. Others would argue (and again we wouldagree) that the gures point to a political problem: ourdemocracy cannot work well when many citizens aredenied the opportunities that strong educations afford.We would add that the gures highlight a fundamentalbusiness problem : companies operating in the U.S.cannot succeed without well-educated, highly skilled

employees. Moreover, the living standards of mostAmericans will not rise if their workplace skills lag muchof the worlds. The situation captured in the OECDdataand reected also in the mediocre performanceof U.S. students on international testsdoes not allowbusiness leaders to sit on the sidelines.

Furthermore, signs of progress in U.S. education makethis a promising time for business to be on the eldrather than on the sidelines. A number of trends, somea generation in the making, are converging in ways thatmake possible rapid improvement in America's educationsystem. In recent years, U.S. schools have seen markedinvestments in teaching and management talent; theadoption of rigorous standards, most recently with theCommon Core State Standards; new technologies andmodes of teaching that enable personalized learning; awave of data collection and analysis that highlights whatworks in education; growth in options that allow parentsa role in choosing their childrens schools; and newincentives that catalyze innovation such as the federalRace to the Top Fund. This new dynamism in K12education gives business an unprecedented opportunityto support changes that will bolster Americas futurecompetitiveness.

4M. Goodman, R. Finnegan, L. Mohadjer, T. Krenzke, and J. Hogan(2013), Literacy, Numeracy, and Problem Solving in Technology-RichEnvironments Among U.S. Adults: Results from the Program for theInternational Assessment of Adult Competencies 2012: First Look(NCES 2014-008), U.S. Department of Education, Washington, DC:National Center for Education Statistics.

K12 EDUCATION AND THE ROLE OF BUSINESS

A Problem for Business

Allen S. Grossman, Jan W. Rivkin, Kevin W. Sharer, and Michael E. Porter


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0

10

20

30

40

50

60

70

55-65 45-54 35-44 25-34

P e r c e n t o f a d u

l t s i n t o p t w o p r o f i c i e n c y c a t e g o r i e s

-10

-5

0

5

10%

55-65 45-54 35-44 25-34

U.S.

Intl.avg.

More recently educated

a d v

a n t a g e

U . S .

d i s a d v

a n t a g e

U . S .

-20

-15

-10

-5

0

5

10%

Literacy Problem-solving Numeracy

5565

4554

3544

25341624

5565

4554

3544

25341624

5565

4554

3544

2534

1624

U . S .

a d v

a n t a g e

U . S .

d i s a d v

a n t a g e

FIGURE 10: ADULT LITERACY COMPETENCY BY AGE COHORT

FIGURE 11: RELATIVE ADULT COMPETENCIES BY AGE COHORT

Source: Goodman, M., Finnegan, R., Mohadjer, L., Krenzke, T., and Hogan, J. (2013). Literacy, Numeracy, and Problem Solving inTechnology-Rich Environments Among U.S. Adults: Results from the Program for the International Assessment of Adult Competencies2012: First Look (NCES 2014-008). U.S. Department of Education. Washington, DC: National Center for Education Statistics.

Vertical axis = % of U.S. adults in top two prociency categories minus % of all international adults in top two prociency categories.

Source: Goodman, M., Finnegan, R., Mohadjer, L., Krenzke, T., and Hogan, J. (2013). Literacy, Numeracy, and Problem Solving inTechnology-Rich Environments Among U.S. Adults: Results from the Program for the International Assessment of Adult Competencies2012: First Look (NCES 2014-008). U.S. Department of Education. Washington, DC: National Center for Education Statistics.


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16

Broad, Generous, Helpful, andInadequate EngagementHow well is business tapping this opportunity? We usedthe 201314 alumni survey to gauge how business

leaders are involved in education todaywhether theyare on the sidelines, on the playing eld, or elsewhere.More broadly, since late 2012, the HBS project on U.S.competitiveness has been working with the Bill andMelinda Gates Foundation and The Boston ConsultingGroup (BCG) to ask, How can business leaders partnerbetter with educators to support Americas students andschools? The rest of this section draws on that work,including what we believe to be the rst-ever nationalsurvey of school superintendents on the role of businessin education. The survey invited the superintendentsof the 10,000 largest school districts in America toparticipate, and more than 1,100 did. The full ndingsof the Gates/BCG/HBS joint effort appear in thepublications shown at the bottom of this page.

The superintendent and alumni surveys agree thatbusiness is broadly engaged in supporting K12education in America. Among the superintendents,95% reported at least one business-based effort in theirschool districts. Of the alumni working at rms with U.S.operations, 63% reported at least one company activityto support schools.

There are multiple signs, however, that this businessengagementwhile broadis not deep. Only 12%of superintendents characterized their businesscommunities as deeply involved in their school districts.And only 7% of alumni respondents described their rmsas deeply involved in public education. (See Figure 12.)

There seem to be many business bystanders.

Moreover, when asked how business engages,superintendents reported a great deal of checkbookphilanthropy: businesses give money, support studentsthrough scholarships, donate backpacks or computers,and so on. (See the left half of Figure 13.) Deeperengagements to support the professional development ofteachers or to align curricula with workplace needs weremuch less common. Like superintendents, alumni alsoreported a lot of checkbook philanthropy, and tellingly,they often didnt know whether their rms supportedschools in certain ways. (See the right half of Figure 13.)

Fortunately, the business engagements in schools seemto work. Well over 80% of surveyed superintendents saidthat business efforts have a positive effect on studentoutcomes, and virtually none reported a negative effect.Superintendents also reported that business-sponsoredefforts in schools that were part of a larger state-wideor national program were more likely to have a majorpositive effect on students than were purely localprograms. Yet collectively, they said that local programs

http://www.hbs.edu/competitiveness/research/pk12-education/publications.html


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outnumbered larger efforts by six to one. Businessesseem to be allocating resources to local programs,perhaps pet projects, even though efforts associated withstate-wide or national programs are more effective.

Overall, then, a strong impression emerges from the

surveys as well as interviews with leaders in the eld:

today, business leaders support schools through afragmented array of subscale efforts that are generous,well-intended, and effective at alleviating some of thesymptoms of a weak educational system, but inadequatefor helping to strengthen the system .

Superint ende nts :Which statement best describes the

business communitys overallengagement with your school district?

Busines s Le aders :Which statement best describes your

firms engagement with the publiceducation system?

12%

51%

37%

7%

25%

62%

6%

Barely ornot at allinvolved

Barely ornot at allinvolved

Somewhatinvolved

Somewhatinvolved

Deeply involvedDeeply involved

Do not know

Super int enden ts:Do businesses in your district do this?

Busines s Le ade rs :Does your firm do this?

0% 25% 50% 75% 100% 0% 25% 50% 75% 100%

Donate money

Support students

Donate goods

Advocate for schools

Contribute to curriculumdevelopment

Assist in district-levelimprovement

Support professionaldevelopment

YES NO DO NOT KNOW

FIGURE 12: BUSINESS ENGAGEMENT IN EDUCATION

FIGURE 13: ACTIONS TAKEN BY BUSINESSES IN SCHOOLS


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18

Promising Models of DeeperEngagementFortunately, our work with the Gates Foundation andBCG has identied progressive business leaders who are

partnering with educators in creative ways that promiseto have greater, lasting impact on the nations educationsystem and its students .

The models of deeper engagement fall into threecategories:

Laying the policy foundations for education innovation .Some business leaders are joining with educatorsand using their substantial local inuence toadvocate for policies, such as the CommonCore State Standards, that enable innovation ineducation. In Denver, for instance, business leaders

recently lobbied successfully for tax increases thatwould protect school innovation in the face of cutsin the wider city budget.

Scaling up proven innovations in education . There isno lack of success stories in Americas schools, butsuccessful efforts that emerge in one locale are toorarely replicated elsewhere. A number of businessleaders, working with educators, are now usingtheir competence in scaling operations to expandprograms proven to boost student outcomes. Forexample, ExxonMobil has sponsored the NationalMath and Science Initiative, enabling it to take twolocal efforts to improve science and math instructionand move them toward national scale.

Reinventing local education ecosystems . ManyAmerican cities and towns have a host of programsto support children but lack strategies for aligningthose programs, lling gaps between programs,eliminating redundancies, agreeing on goals,measuring success, and investing behind whatworks. In a growing number of cities, businessleaders are bringing their strategic skills to bearon this problem. The GE Foundation, for instance,

is investing deeply in seven school districts whereGE has major operations, in efforts to upgrade themanagement processes and strategic capacity oflocal education systems.

The reports listed at the bottom of page 16 discuss thesethree types of transformational actions in depth.

School superintendents say that they are open to deeperbusiness engagement. When surveyed, more than

80% of superintendents called for greater businessinvolvement in their districts in the future, and most ofthem hoped to see new forms of engagement. Only 0.5%called for business to be less involved. Superintendentswere especially eager for business engagements thatwould better prepare their students for the workforce.

Overcoming Barriers to BusinessEngagementBusiness leaders who aim to partner deeply witheducators, however, should be aware that our surveysreveal at least four important barriers to suchengagements:

First, educators and businesspeople lack a sharedview of the reality of U.S. education. We askedschool superintendents to assess the very same

elements of the U.S. business environment, inthe very same way, as did alumni, and Figure 14summarizes their responses. On most elements ofthe environment, superintendents and businessleaders saw eye-to-eye; Figure 14 resembles Figures4 and 5. But superintendents had a much morepositive assessment of the nations K12 educationsystem than did business leaders.

Second, no one knows with condence whichbusiness engagements in education work well andwhy. Only 10% of superintendents reported thatthe impact of any of the business activities in theirdistricts had been evaluated and measured in formalstudies.

Third, superintendents have little condence thatbusiness leaders deeply understand education.Only 3% of superintendents characterized theirbusiness communities as well informed about publiceducation, while 14% described their businesscommunities as misinformed. (See Figure 15.)


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FIGURE 14: ASSESSMENTS OF ELEMENTS OF THE U.S. BUSINESS ENVIRONMENT BY SCHOOL SUPERINTENDENTS



TAX CODE

K1 2 EDUC ATION SY STEM

UNIVERSITIES

ENTREPRENEURSHIP

SKILLED LABORHIRING AND FIRING

INNOVATION

REGULATION

CLUSTERS

CAPITAL MARKETS

MACRO POLICY

POLITICAL SYSTEM

PROPERTY RIGHTS

LEGAL FRAMEWORK

FIRM MANAGEMENT

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

-60% -40% -20% 0% 20% 40% 60% 80% 100%

U . S . t

r a j e c t o r y c o m p a r e d t o o t h e r a d v a






Super int e ndents:Which statement best describes how

knowledgeable business leaders in yourdistrict are about public education?

Busine s s Le aders:Which statement best describes howknowledgeable you are about public

education?

3%

52%30%

14%

1%

35%

54%

10%

1%

Barely ornot informed

Somewhatinformed

Well

informed

Well informed Do not know

Misinformed

Do not know

Somewhatinformed

Barely ornot informed

FIGURE 15: BUSINESS LEADERS KNOWLEDGE OF PUBLIC EDUCATION


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20

Superintendents:

Which statement best describes the commitment toK12 education among business leaders in your district?

Business Leaders:

Which statement best describes your personalcommitment to K-12 education?

0% 10% 20% 30% 40% 50% 60% 70%

Deeply interested in improving K12education primarily because every child

deserves a good education

Deeply interested in improving K12education primarily because todays

students are tomorrows workers

Deeply interested equally because every childdeserves a good education and becausetodays students are tomorrows workers

Not deeply interested in improvingK12 education

Do not know

FIGURE 16: BUSINESS LEADERS COMMITMENT TO EDUCATION IN THE UNITED STATES

Meanwhile, 35% of alumni described themselves aswell informed about public education. We may be inthe worst scenarioin which business leaders arenot well informed but believe they are.

Finally, educators often question the motives of

businesspeople who get involved in education. AsFigure 16 shows, superintendents are much morelikely than businesspeople themselves to believethat business leaders are not deeply interested inimproving K12 education or are engaged just forreasons related to workforce development.

We highlight these barriers not to discourage businessleaders from deeper and enduring engagements witheducators, but rather to raise the odds that suchengagements will succeed. The barriers may be high, butso are the stakes. A stronger education system is vitalnot only for the economic future of the average American

but also for the long-run health of U.S. enterprises. Thetime is right for every business in America to rethinkhow it supports schools and studentsto move fromprograms that patch over weaknesses in the educationsystem toward strategies that help educators transformthe system.


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The OECD data discussed on page 14showing a

growing U.S. disadvantage in adult competenciespointto weaknesses not only in Americas K12 educationsystem but also in the way we develop skills after highschool and on the job. Troubles in workforce skills havebeen evident in the United States for years. In annualsurveys conducted by ManpowerGroup since 2006,the portion of U.S. employers reporting difculty inlling positions reached as high as 52%, with lack oftechnical skills in applicants among the top causes. 5 In the 2011 HBS survey on U.S. competitiveness,alumni involved in rm location choices reported thataccess to skilled labor was more often a reason to movea business activity out of the United States than it wasa reason to keep an activity in America. 6 In 201314 asin past years, alumni assessed workforce skills as a U.S.strength that is in decline. (See Figure 5 on page 10.)

Skills shortages make it hard for rms operatingin the United States to increase their productivityconsistently, the major driver in sustaining their abilityto compete and raising their capacity to pay workers.Thus, skills issues are at the heart of the aspect of U.S.competitiveness that worries us the most: the stagnationof living standards among most Americans. Historically,the prosperity of Americas middle class rested on a

foundation of world-class workplace skills.

That has proven especially true for workers in so-calledmiddle-skills jobsroles that require more educationand training than a high school diploma but less than afour-year college degree. Middle-skills jobs are estimatedto account for as much as 48% of all work in America. 7 They have provided high and rising living standards forgenerations of American welders, machinists, health careworkers, computer technicians, and others. Any path togreater U.S. competitiveness, and especially to higherliving standards in America, will require reinvigoratingthe skill base of Americas workforce, particularly formiddle-skills occupations.

The HBS project on U.S. competitiveness launched aneffort in 201314 to examine deeply the past, present,and future of workforce skills in America. Led by SeniorLecturer Joseph Fuller, the effort has drawn as keypartners Accenture, the global consulting and technologyrm, and Burning Glass Technologies, an analyticscompany that focuses on workforce data. A full report on

the skills effort will be published in 2015. Early work,

including questions on the 201314 alumni survey,reveals four overarching ndings:

Managers in America have developed approachesto hiring that discourage skills development andexacerbate the shortage of talent with highlydemanded skills.

Americas public discourse on skills takes place at ahigh level of aggregation, obscuring the true natureof the challenges facing the country. Real hiringoccurs in a multitude of micro-markets that may ormay not have skills gaps.

Most of those micro-markets are marked by poorinformation ow, resulting in a perverse combinationof outcomes: employers cant nd the skilledworkers they need, but at the same time, a growingnumber of workers are overqualied for their jobs.

Better skills development in America will requirecollaboration across traditional boundaries, buttoday in practice, such collaboration is rare.

We will elaborate on each nding in turn.

5Annual ManpowerGroup Talent Shortage Surveys.6Michael E. Porter and Jan W. Rivkin, Prosperity at Risk: Findings of

Harvard Business Schools Survey on U.S. Competitiveness, page 15,January 2012. The report is available on the HBS U.S. CompetitivenessProject website at http://www.hbs.edu/competitiveness.

7Thomas Kochan, David Finegold, and Paul Osterman, Who Can Fix theMiddle-Skills Gap? Harvard Business Review 90 (December 2012):83. Harry J. Holzer and Robert I. Lerman, The Future of Middle-SkillJobs, Brookings Center on Children and Families, February 2009.

WORKFORCE SKILLSJoseph B. Fuller


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22

An Aversion to Full-time HiresFirst, our survey reveals that business leaders in Americaare reluctant to hire full-time workers. When possible,they prefer instead to invest in technology to performwork, outsource activities to third parties, or hire part-time workers. For instance, 46% of survey respondentsstrongly or somewhat agreed that their rms U.S.operations prefer to invest in technology to perform work

rather than hire or retain employees, while only 25%disagreed. 8 (See Figure 17. Numbers in gure do notsum precisely to numbers in text due to rounding.)

Similarly, 49% said that their rms prefer to rely onvendors for work that can be outsourced, while only 29%reported that their rms would rather hire additionalworkers. 9 Respondent rms that increased their relianceon part-time workers during the past three yearsoutnumbered those that relied less on part-timers by aratio of two to one.

Those tendencies do not bode well for skills in theAmerican workforce: rms invest most deeply in full-timeemployees, so preferences for automation, outsourcing,and part-time hires are likely to lead to less skillsdevelopment. True, the workers who run the automatedequipment, the employees of outside vendors, andthe part-timers may receive some training, but that isunlikely to offset the skills that are no longer developedin equivalent full-timers. And indeed, by one estimate,spending on training in America fell from 0.52% of grossdomestic product in 2000 to 0.34% in 2012. 10

A Multitude of Micro-marketsA lack of training by employers and insufcient skills-building by the education system can lead to skillsgapssituations in which employers seeking additionaltalent cannot nd workers with relevant skills. In recentyears, erce debates have raged over the question ofwhether skills gaps are truly prevalent in the U.S. 11

8We were concerned that the phrasing of the survey question wouldunduly inuence responses. To guard against that possibility, werandomly split the respondents into two groups. Half were presentedthe statement, My rms U.S. operations prefer to invest in technologyto perform work when possible rather than hire or retain employees,and the other half read, My rms U.S. operations prefer to hireor retain workers when possible rather than invest in technology toperform work. For the former statement, 53% agreed and 19%disagreed. For the latter, 39% disagreed and 32% agreed. The 46%reported in the text is the average of those who agreed with the formerstatement and those who disagreed with the latter.

9This question was also handled in the manner described in the previousfootnote.

10 Cait Murphy, Is There Really a Skills Gap? Inc ., April 2014, citingTraining magazine. The gures are derived from Training Industry

Reports, Training magazine, 2002 and 2013, and the Bureau ofEconomic Analysis, National Income and Product Accounts Tables.

11 For example, see Edward P. Lazear and James R. Spletzer, The UnitedStates Labor Market: Status Quo or A New Normal? National Bureauof Economic Research Working Paper No. 18386, September 2012;Harold L. Sirkin, Michael Zinser, and Justin Rose, The U.S. SkillsGap: Could It Threaten a Manufacturing Renaissance? The BostonConsulting Group, August 2013; Heidi Shierholz, Is There Really aShortage of Skilled Workers? Economic Policy Institute, January 23,2014; Paul Krugman, Jobs and Skills and Zombies, The New YorkTimes , March 30, 2014; Cait Murphy, Is There Really a Skills Gap?Inc ., April 2014.

15% 34% 15% 21% 9% 4% 3%

STRONGLYAGREE

Your firm prefers to rely on vendors that can be outsourced rather than hire additional employees

SOMEWHATAGREE

NEITHER AGREENOR DISAGREE

SOMEWHATDISAGREE

STRONGLY DISAGREE

DO NOTKNOW

N/A

17% 29% 19% 17% 9% 6% 4%

STRONGLYAGREE

Your firm prefers to invest in new technology to perform work rather than hire or retain employees

SOMEWHATAGREE

NEITHER AGREENOR DISAGREE

SOMEWHATDISAGREE

STRONGLY DISAGREE

DO NOTKNOW

N/A

Compared to three years ago, your firms U.S. operations use part time workers

20% 49% 10% 9% 13%

MORE ABOUT THE SAME LESS U.S.OPERATIONSESTABLISHED


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Those who see major skills gaps in America typicallypoint to two types of evidence. First, when surveyed,employers often report that they cant nd the skilledworkers they want to hire. 12 Our alumni survey providessome conrming evidence: pluralities of respondentssay that it is difcult to ll middle-skills jobs in their

U.S. operations; that it is harder to ll such positionsthan it was three years ago; and that they expect theirdemand for such employees to increase over the nextthree years. (See Figure 18.) Second, job postings haveremained numerous even during periods of relatively highunemployment. In May 2014, for example, 9.8 millionAmericans were unemployed, but job postings listed 4.6million open positions. The unemployed must be stayingjobless, it is reasoned, because they lack the skills to llthe positions.

Skeptics of skills gaps counter by pointing out thatjob posting data are notoriously unreliable. Companiescommonly post positions they dont intend to ll, makemultiple postings for single jobs, and up-credentialjobs (that is, raise requirements) when the labor marketis slack. Likewise, skeptics argue, managers claimsthat they cant nd talent are not credible. If skills gapsare so prevalent, why arent companies raising wagesfaster for skilled employees? If skills problems are sodebilitating, why arent companies investing more todevelop workers with the requisite skills?

We nd the debate about the presence or absence of anational skills gap to be misplaced. From an employersand a job hunters perspectives, the relevant questionis not, Do we have enough workers in America withmiddle skills? or even Do we have enough computerprogrammers in the U.S.? Rather, the question is, Do

we have enough Java programmers with SQL experienceto meet demand in Wichita this month? The U.S. labormarket consists of a multitude of micro-markets thatmay or may not have skills gaps.

Moreover, the pattern of demand for workers ebbs andows with changes in technology, consumption in endmarkets, and competitive dynamics in industries. Evenmore relevant than the question Do we have enoughworkers with the specic skills in demand at thismoment? is Do we have workers with the requisiteexperience and capacity to learn to remain employedas job requirements change over the course of theircareers?

12 For example, see The Shocking Truth About the Skills Gap,CareerBuilder, 2014; ManpowerGroup 2013 Talent Shortage Survey;WSJ/Vistage Small Business CEO Survey, June 2014; and Accenture2014 Manufacturing Skills and Training Study.

7% 32% 17% 21% 5% 18%

VERYDIFFICULT

How hard or easy is it for your firms U.S. operations to fill middle-skills jobs?

SOMEWHATDIFFICULT

NEITHER EASY NOR DIFFICULT

SOMEWHATEASY

VERY EASY

DO NOTKNOW

Compared to three years ago, has it become harder or easier to find qualified middle-skills employees?

5% 24% 29% 14% 2% 26%

MUCHHARDER

SOMEWHATHARDER

NEITHER HARDERNOR EASIER

SOMEWHATEASIER

MUCHEASIER

N/A ORDO NOT KNOW

Over the next three years, do you expect your firms demand for middle-skills employees to

3% 12% 33% 35% 6% 11%

DECREASE AGREAT DEAL

DECREASESOMEWHAT

REMAIN MORE ORLESS THE SAME

INCREASESOMEWHAT

INCREASE AGREAT DEAL

DO NOTKNOW

FIGURE 18: CONDITIONS IN THE MIDDLE-SKILLS LABOR MARKET


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24

Similarly, we nd wide categories like middle-skillsjobs to be too broad and potentially misleading. Theterm has its origins in the late 1950s. Even were sucha denition useful a half-century ago, it is inadequatefor todays economy. The middle-skills category in the21st century encompasses jobs with vastly different

career prospects, average incomes, and postsecondaryeducational requirements. Consider, for example, thejobs of pharmacy technician and entry-level computerhelpdesk agent. Formally, both are middle-skills jobs.But pharmacy technician is a dead-end jobwith anaverage annual salary below $30,000, little upwardmobility, and certications that dont port to other jobswhile helpdesk agents make nearly $45,000 and canuse their certications as launching pads into advancedcomputer and network support roles that pay muchmore. 13

Poor Information Flow along theWorkforce Development Supply ChainAmerica has, then, a huge number of heterogeneous anddynamic micro-markets for labor, in which workers andrms must make decisions about long-lived investmentsin skills. For such markets to work well, we need richand timely ows of information about the skills thatemployers need today and expect to require in thefuture, the wages that the skills are likely to command,and the education and training credentials that willequip Americans with those skills.

To the contrary, however, we see poor information owsall along the supply chain for talent. Few employersengage in serious workforce planning, making it harderfor them to project their future needslet alonecommunicate those needs to schools and students.Employers appear to expect that they can ll many oftheir job requirements with little advance notice. Thathamstrings the suppliers of talent, such as communitycolleges, that often have inadequate connections toemployers and lack the exibility to respond to changesin employers needs with the speed employers seem

to expect. Only faint market signals reach students asthey decide how to invest precious time and tuitiondollars. Many students choose careers with little hardinformation, based on hearsay, peer inuence, parentalinput, and casual preferences. The absence of sufcientcounseling resources across the high school andcommunity, professional, and technical college systemscompounds those problems. For example, the averagehigh school counselor serves nearly 240 students and

has little granular information about local job-marketconditions. 14

Poor information seems partly to blame for the growingnumber of young workers who are overqualied forthe jobs they hold. In one recent study, for instance,

Neeta P. Fogg of Northeastern University and Paul E.Harrington of Drexel University documented the portionof college-educated workers in occupations that do notrequire the knowledge, skills, and abilities developedin college. As shown in Figure 19, the portion of suchmal-employed individuals has climbed rapidly since2000, especially among the youngest workers. 15 Arelated study from the New York Federal Reserve concursthat recent graduates are increasingly likely to be in jobsthat do not require a college degree. When in such jobs,they are more likely than past cohorts to be in low-wagejobs that dont require a college degree (think barista)rather than high-wage jobs that do not require a collegedegree (electrician, dental hygienist). 16 This suggeststhat college graduates are increasingly vying for jobsagainst individuals with associates degrees, technicalcerticates, and high school diplomas.

In sum, Americas talent system displays a classichallmark of dysfunctional supply chains: oversupplyalongside shortages. In this case, people areoverqualied for the jobs they hold, but simultaneously,many positions that companies view as competitivelyimportant remain unlled due to a lack of qualiedapplicants.

13 The middle-skills classication is problematic for other reasonsalso. Middle-skills jobs are usually dened as roles that require moreeducation and training than a high school diploma but less than afour-year college degree. This denition focuses on what an individuallacks (a college degree) rather than what skills he or she possesses.It suggests that there are standard skills conferred by a high schooldiploma and a college degree when, in fact, there are huge variations

across schools, curricula, and jurisdictions.14 Source: U.S. Department of Education, National Center for Education

Statistics, Common Core of Data (CCD), State Nonscal PublicElementary/Secondary Education Survey, 2011-12 v.1a.

15 Neeta P. Fogg and Paul E. Harrington, Rising Mal-Employment andthe Great Recession: The Growing Disconnection between RecentCollege Graduates and the College Labor Market, Continuing HigherEducation Review 75 (2011): 51-65.

16 Jaison R. Abel, Richard Deitz, and Yaqin Su, Are Recent CollegeGraduates Finding Good Jobs? Current Issues in Economics andFinance 20:1 (2014): 1-8.


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22%

24%

26%

28%

30%

32%

34%

36%

38%

40%

2000 2007 2010

2024

25-29

55-64

30-34

45-5435-44

P e r c e n t a g e o f a g e c o h o r t

FIGURE 19: MAL-EMPLOYMENT RATES AMONG EMPLOYED COLLEGE GRADUATES, BY AGE COHORT

Sources: U.S. Census Bureau Current Population Survey annual public use micro data les 2000, 2007, 2010; tabulations byDrexel University Center for Labor Markets and Policy. From Neeta P. Fogg, and Paul E. Harrington, Rising Mal-Employment and theGreat Recession: The Growing Disconnection between Recent College Graduates and the College Labor Market, Continuing HigherEducation Review 75 (2011): 5165.

Missed Opportunities for CollaborationThe situation we have portrayed calls for new approachesthat rely on collaboration across traditional boundaries.Businesses should work with educational institutions tosteer students onto career paths and into curricula thatwill make the students employable, the rms successful,and the nation competitive. Companies that need similarskills should work together to build future workforcesrather than simply poach scarce talent from one another.And leaders in business, education, and governmentshould cooperate to improve the quality of informationavailable in dynamic micro-markets for labor. To do allthis, companies and industries will have to articulate the

skills and aptitudes required for jobs that are currentlyhard to ll or jobs likely to have excess demand in thefuture.

Indeed, some of the most effective skills-developmentinitiatives we have seen have this collaborative character.In North Carolina, for instance, Siemens has respondedto a shortage of advanced manufacturing workers bypartnering with Central Piedmont Community College.

The company provides curriculum, equipment,apprenticeships, funding, and instructors that allow the

college to develop the workers that the company wouldlove to hire. In the electrical utility industry, where theworkforce is aging rapidly, leading companies havebanded together to form the Center for Energy WorkforceDevelopment. This nonprot consortium works witheducational institutions and unions to create successfulcareer pathways into the industry. Their collective effortsfocus, for example, on low-income young adults andveterans returning from active duty.

Yet in our 201314 HBS survey, when we askedrespondents what their rms do to develop middle skills

in their workforces, we found that such collaborativeinitiatives were relatively rare. (See Figure 20 on page26.) Nearly half of the respondents rms offer their own,solo internal training programs or on-the-job training.But only 27% work with institutions such as communitycolleges, and only 23% of rms participate in industry-wide initiatives to collaborate on training. The dominanttendency is to go it alone, which seems unwise in theface of collective, cross-sector challenges.


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In sum, the early work by Accenture, Burning Glass,and HBS on workforce skills reveals a labor market thatis failing. All its major participantsemployers, newentrants to the workforce, the unemployed, educators,

and policymakerscomplain that it yields unacceptableresults. The supply chain for skilled talent is markedby poor information ows, inadequate collaboration, aneducation system not focused enough on cultivatingskills that employers want, and companies that hire inways that discourage investment in those skills. Thepersistence of these issues is unacceptable as structuralproblems in the U.S. economy make skills developmentan urgent priority. Tackling the skills challenge willrequire individual players both to acknowledge their rolesin this outcome and to collaborate in new ways to createa far more efcient marketplace for skills and workers.

The importance of rising to that challenge cannotbe overstated. Left unchecked, the problems facingaspiring workers, educators, and employers will onlygrow. Workers will not invest in developing their skillsif it does not lead to employment and higher livingstandards. Employers will continue to turn to technology,vendors, or other alternatives to address their needs.The associated loss of productivity growth will furtherundermine both Americas economic growth and its

long-term competitiveness. Only by developing newinformation channels, collaborating more effectively, andspreading best practices within and across regions andindustries will American employers gain sufcient access

to the skilled workers they require and workers regainthe opportunity to enjoy real income growth.

Toward this end, the HBS competitiveness team iscontinuing its work with a variety of partners and willdisseminate its ndings as the work develops. Monitorhttp://www.hbs.edu/competitiveness for progress.

23%

27%

45%

49%

51%

48%

35%

32%

26%

25%

20%

19%

Create internal training programs to build middle skills among employees

Offer on-the-job training through apprenticeships or internships for trade, technical, or community collegestudents to train middle-skills talent

Collaborate with community colleges to develop an adequate talent pool of potential middle-skills employees

Participate in industry-specific initiatives to collaborate on training

YES NO DO NOT KNOW

FIGURE 20: ACTIONS COMPANIES TAKE TO ADDRESS AVAILABILITY OF MIDDLE-SKILLS WORKERS


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It is widely understood that Americas companies dependheavily on the nations transportation infrastructure

to bring inputs into their operations, to deliver goodsto customers, and to move personnel where they areneeded. Infrastructure affects the costs, quality, speed,service, and safety of business in America. Transportationinfrastructure also shapes the living standards of all U.S.citizens, by inuencing commuting times and the cost ofliving, for instance. Transportation infrastructure has anespecially profound impact on less afuent citizens, whoare more likely to rely on public transportation and to livein neighborhoods with few transport options. For them inparticular, mobility is opportunity.

Because it is so vital to America's businesses andcitizens, transportation infrastructure has been a focaltopic for the HBS project on U.S. competitiveness. In201314, Professor Rosabeth Moss Kanter, the head ofHBSs transportation infrastructure efforts and an experton change leadership, added a set of infrastructurequestions to the alumni survey. She also convened anational summit of 200 top leaders across sectors andindustries to dene an agenda for action, Americaon the Move: Transportation and Infrastructure for the21st Century. (For more information on the summitand agenda, see http://www.hbs.edu/competitiveness/ research/transportation-infrastructure/america-on-the-

move.html.) This section draws lessons from both thesurvey and the summit.

A Strength, but in Decline

The challenges to American transportation and logisticsinfrastructure are well publicized. The American Societyof Civil Engineers recently gave the United States a D+grade for the quality of its infrastructure. The federalHighway Trust Fund nearly became insolvent in 2014.Congresss recently extended funding until May 2015,but there is no plan for a longer-term funding solution.Such challenges have contributed to increasing concernsabout what has historically been a U.S. strength.

Respondents to the 2012 HBS survey on U.S.competitiveness rated logistics infrastructure asa competitive strength but were overwhelminglypessimistic about its trajectorysignicantly more sothan a sample of the general population. 17 On the 201314 survey, a majority of respondents, 75%, reportedthat logistics infrastructurerailroads, highways, ports,and airportswas at least average compared to otheradvanced economies, with 52% rating it better or muchbetter than average. However, the majority, 51%, alsoreported that this infrastructure is falling behind thatof other advanced economies, with only 8% indicatingoptimism about its trajectory. Compared to past years,there is a slight upswing in optimism: in 201314, 10%fewer business leaders reported a belief that logistics

infrastructure was declining than in 2012.

17 Michael E. Porter, Jan W. Rivkin, and Rosabeth Moss Kanter,Competitiveness at a Crossroads: Findings of Harvard BusinessSchools Survey on U.S. Competitiveness, February 2013.

TRANSPORTATION INFRASTRUCTURERosabeth Moss Kanter

14% 40% 26% 19%

BETTER THAN3 YEARS AGO

In your experience, is the cost and quality of using automobiles, trucks, trains, planes, and other vehicles in theU.S. to move people and goods

ABOUT THE SAME WORSE THAN3 YEARS AGO

DO NOTKNOW

In your experience, is the condition of airports, ports, roads, and other infrastructure in the U.S.

9% 40% 42% 9%

BETTER THAN3 YEARS AGO

ABOUT THE SAME WORSE THAN3 YEARS AGO

DO NOTKNOW

FIGURE 21: THE CONDITION OF INFRASTRUCTURE AND THE TRAJECTORY OF MOVING PEOPLE AND GOODS


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At the AOTM summit, participants agreed that airportsare built without strategic priorities, contributing tothe delays that trouble survey respondents. Summitparticipants also agreed that highway congestion inparticular is a major drag on the American economy.

One noteworthy contrast is that top CEOs at the summitwere much more concerned than survey respondentsabout difculties getting goods into the country. Retail

and logistics leaders at the summit decried port delaysas a major pain point for their U.S. operations andechoed each others calls for a national freight corridorstrategy as well as regional freight strategies.

Which deficiencies in transportation and other infrastructure in the U.S. create problems,reduce quality, or raise costs for your firms U.S. operations?

4%

6%

11%

16%

18%

28%

32%

45%

46%

Some other factor

Difficulties moving goods between cities/regions in the U.S.

Difficulties getting goods into the U.S.

Inadequate connections across transportation modes

Insufficient Internet/digital network speed or bandwidth

Lack of public transportation for employees or potential employees

Deteriorating roads or bridges

Airport delays or inefficiencies

Highway traffic congestion

Portion of respondents*

*Each respondent was asked to identify up to three deficiencies.

FIGURE 22: PAIN POINTS AND BOTTLENECKS IN U.S. TRANSPORTATION INFRASTRUCTURE


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Investment PrioritiesSurvey respondents were asked to rate the threeimprovements or innovations in transportation andinfrastructure with the most promise to improvetheir rms ability to succeed in the United States.(See Figure 23.) The top-ranked desire, with 39% ofrespondents including it among their top three, washigh-quality public mass transit reaching more places.Leaders from large organizations evinced particularlystrong support, with 43% ranking improved transit asa priority; small business leaders were somewhat moredivided at only 34%. That there was a consensus forpublic transit among business leaderswho themselvescan easily get private transportationwas striking.

The other top-ranked priority among survey respondentswas universal high-speed broadband telecom networks,

with 37% ranking it a priority. Support for universalbroadband connectivity was consistent across rm sizes.High-speed networks are increasingly essential to theability of all enterprises to be competitive.

Other priorities for improvement included better or fasterpassenger rail (26%), more airports or ights (24%),better coordination or connections across passenger

modes (22%), and collaborative regional planning bythe public and private sectors (19%). Across all thesepriorities, leaders from large enterprises tended toevince stronger support than the mean, while smallbusiness leaders were less interested, which presumablyreected the fact that mobility across regions can be

less important to enterprises with limited geographicscope. In air transportation, particularly, this differenceheld: 27% and 26% of leaders from medium-sized andlarge rms, respectively, ranked more airports or moreights as a priority, while only 19% of those from smallbusiness thought better air transportation would improvetheir ability to compete.

Summit participants were optimistic about the potentialof new technologies, such as connected vehicles andsensor-enabled roadway optimization, to improve theutilization of Americas transportation assets. Thecontrast between summit discussions and surveyresultse.g., only 12% of survey respondents expressedan interest in technology-enabled vehicleslikelyreects the fact that the CEOs and national leaders atthe summit have a broad perspective, whereas manysurvey respondents come from smaller, more localenterprises.

Which improvements or innovations in transportation and other infrastructure would make iteasier for your firms U.S. operations to succeed?

9%

12%

16%

19%

22%

24%

26%

37%

39%

Some other innovation or improvement

Technology-enabled vehicles (cars, trucks, or buses)

Less reliance on indiv idually-owned automobiles

Collaborative regional planning by public and private sectors

Better coordination and/or connections across transportation modes

More airports or more flights

Better or faster passenger rail

Universal high-speed broadband telecom networks

High-quality public mass transit reaching more places

Portion of respondents*

*Each respondent was asked to identify three improvements or innovations.

FIGURE 23: PRIORITIES FOR IMPROVEMENT AND INNOVATION IN U.S. TRANSPORTATION INFRASTRUCTURE


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Action ItemsBased on discussions at the America on the Movesummit and survey ndings, Professor Kanter identiedopportunities for business and government leaders toenhance the competitiveness of U.S. transportationinfrastructure going forward. Specically, we can:

1. Create a new vision for a Connected America. Sucha vision would focus on corridors with economicimpact potential, such as North American tradevia north-south rail lines that connect Canadaand Mexico; cross-state economic zones; andinvestments in sufcient broadband for high-speedcommunication networks.

2. Develop a national infrastructure strategy thatacknowledges new realities such as the populationshift from suburbia to cities and a need to changefocus from single transportation modes to inter-modal connections. Transportation plays vital rolesin addressing many other societal problemsincluding education, public health, job creation, andenvironmental protectionand the national strategyshould reect and rene those roles. A key stepwould be to modernize the international Open Skiesagreements and air trafc control. Responsibilityfor infrastructure implementation might devolve toregional, often metropolitan, planning groups, withthe exibility to direct funding.

3. Rename the Highway Trust Fund the Mobility Trust ,and expand its scope to back R&D and standardsfor new technologies that promote mobility.

4. Assemble benchmarking information e.g., thecomparative efciencies of ports at moving goods,commuting times, buses to health providers,conditions of local roads and bridges. Open moregovernment data, such as weather information, foranalysis and communication by private companies.

5. Mount a series of convenings across the country to stimulate private-sector investor interest andcapability for public-private partnerships. Developtoolkits and technical assistance both nationallyand regionally. Learn from existing state and localinfrastructure bank initiatives about what mightwork nationally.

6. Engage entrepreneurs and emerging leaders in thequest for mobility. Provide publicity, seed funds,challenge grants, and research opportunities.

Overall, we see promising opportunities to boostAmericas competitiveness by building newconnectionsacross regions, across modes oftransportation, and across the public-private divide.


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A truly competitive U.S. economy would lift both rmsand citizens. But our survey ndings and other evidencereveal that that is not happening today in America.

Instead, our recovering economy is doing just halfits job: the typical large or midsized rm in Americais rallying or even prospering, as are highly skilledindividuals. But many middle- and working-class citizensand small businesses are struggling.

Some have argued that global and technologicaldevelopments make economic stagnation inevitablefor ma

an economy doing half its job

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