The skills gap hitting the US

I recently came across an interesting study on the employment in the US semiconductor sector. This study looked at what happened to the semiconductor study in the US after 2018, when the US government started to implement protectionist measures.

The basic idea of protectionist measures like the “Buy American and Hire American” executive order under Donald Trump in 2017, as well as measures like the CHIPS and Science Act under President Biden and the latest round of tariffs on foreign semiconductors all aimed at protecting domestic producers of semiconductors from foreign competition and boost domestic job creation.

Yet, the study finds that since 2018, the opposite has happened in the US. By 2022, employment in the semiconductor industry had declined by some 7% compared to 2018 while employment in the rest of the world remained stable or rose slightly.

Employment change in the semiconductor industry in the US and rest of the world since 2014

Source: Canayaz et al. (2024).

The study shows neatly how the decline in employment in the US semiconductor industry is to a large extent driven by companies hiring fewer graduates from university. Meanwhile, the study also shows that since 2018 the number of undergraduate and graduate students in degrees related to semiconductor manufacturing has declined a lot.

Decline in number of students acquiring semiconductor skills

Source: Canayaz et al. (2024).

Now, the authors of the study claim that this decline in employment is a result of the protectionist measures enacted since 2018, but I seriously doubt that. There are a lot of controls that are missing in the study, and I think what is happening is something different.

The US has one of the highest numbers of graduates acquiring skills in technology (semiconductor manufacturing skills are just a subset of them). The only country that comes close to the US is India. Yet, the study notes that it is both in the US and India that the number of students working towards semiconductor-related degrees has declined significantly since 2018.

This makes me wonder if the protectionist measures in the US are really to blame. Why would students stop enrolling for degrees in computer science now that they have an advantage in finding a job compared to foreigners? If anything, I would expect that on the margin, more students for relevant degrees. Yes, US companies may reduce their hiring among graduates, but that could be because of the economic and planning difficulties during the pandemic and the years after the pandemic ended.

Rather, I suspect that something else is going on here. I think that both the US and India have reached a saturation among technology courses and jobs. For most of the 2010s becoming a tech bro was a high-status goal for young adults. Today, that status has diminished somewhat and if anything, the status is linked to software, not hardware. So, naturally, I would expect enrolments to decline like what we saw in the early 2000s after the tech bubble burst. The difference between back then and today is however, that back then all tech fields burst, and job opportunities decreased across software and hardware. Today, hardware skills are uncool, but software skills are still somewhat cool. In the case of AI-related software skills they are even better than cool, they promise a path to getting rich quick.

Clearly, today the decline in student enrolment is much stronger but I wonder if that is still the case if one plots all technology degrees, i.e. software- and hardware-related degrees. I suspect, students are simply focusing more on AI and other software-related degrees, and this exacerbates the decline in students acquiring hardware-related skills.

Meanwhile, other countries with lower wages than the US are educating more and more skilled graduates that can be hired by US firms abroad. As long as they don’t hire them in China or other countries subject to protectionist measures, US semiconductor manufacturers can move production facilities abroad where they have less and less problems finding skilled employees. Countries like Indonesia, Thailand or Vietnam are all emerging as new tech hubs in Southeast Asia and companies from the US as well as other developed countries are taking advantage of that.

So, rather than protectionist measures in the US leading to job losses, I suspect it is simply a combination of more skilled employees in Asian and Eastern European countries with lower wages and US students self-sorting into degrees that promise high salaries domestically like software engineering.

But be that as it may, if this trend continues, a significant challenge is emerging in the US semiconductor industry. US semiconductor manufacturing seems to be heading towards a structural skills shortage which can only be overcome by two measures: Either relax protectionist measures and allow more immigration for people with the required skills or build more factories abroad and re-import chips to the US. And at least so far, US semiconductor companies seem to be doing the latter because politically it is difficult to lobby for the former.