The Global Semiconductor Talent Crunch: How Protectionism Backfired

Yves here. This post illustrates a pet theme of ours: how in complex systems, trying to map a simple path through them often makes things worse. A big reason why is that the parties trying to hack their way through what amounts to a jungle don’t even have a map of the terrain. Protectionism is a case in point.

Development economists have found that erecting various market barriers and providing support to young but high-priority industries can indeed succeed in having them grow big enough to survive global competition. But the US is allergic to industrial strategy even though it wants dirigiste-looking results, namely rebuilding our hollowed-out industrial base and defending, better yet improving, our standing in advanced technologies. The fact that we’ve been unable to increase production of 155 mm shells, and are dependent (per Alexander Mercouris) on a single factory in Poland for TNT (later gen less nasty explosives have proven to be too difficult to produce to date) shows a remarkable failure of planning. Yet that seems to be endemic in a world of MBAs whose brains have been addled by PowerPoint.

By Mehmet Canayaz, Assistant Professor of Finance, Smeal College of Business, Penn State University; Isil Ere, David A. Rismiller Chair in Finance, The Ohio State University; and Umit Gurun, Stan Liebowitz Professor of Finance and Accounting, University Of Texas at Dallas. Originally published at VoxEU

The US aims to revitalise its domestic semiconductor manufacturing industry, but will there be enough skilled workers to meet the ambitious goals? This column presents evidence, based on a global dataset of 1.6 million employees with chip manufacturing skills, that US protectionist policies – increased tariffs and visa restrictions – implemented since 2018 may have undermined the very workforce the industry needs to thrive. The number of US students graduating with skills relevant to chip manufacturing has decreased, and US chip manufacturing firms reduced hiring, especially for entry-level and junior positions.

As the US aims to revitalise its domestic semiconductor manufacturing industry through initiatives like the 2022 CHIPS and Science Act, a critical question looms: will there be enough skilled workers to meet the ambitious goals? In a recent paper (Canayaz et al. 2024), we present new evidence that protectionist policies – increased tariffs and visa restrictions – implemented since 2018, ironically, may have undermined the very workforce the industry needs to thrive.

The semiconductor industry sits at the intersection of national security and economic competitiveness. Recognising this, policymakers have sought to bolster domestic chip production through measures like tariffs, immigration restrictions, and subsidies. However, our analysis reveals that these efforts have had unintended consequences on the industry’s most vital resource: its talent pool.

Building on earlier work examining the broader economic impacts of trade frictions (Fajgelbaum et al. 2020, Amiti et al. 2019), we focus specifically on how protectionist policies have shaped the semiconductor workforce. Our findings paint a concerning picture of declining domestic hiring, especially for entry-level positions, and a shift in career choices away from the chip industry.

Using a comprehensive dataset of 1.6 million employees with chip manufacturing skills worldwide, we employ a difference-in-differences methodology to analyse employment trends before and after the implementation of protectionist measures in 2018. Our study examines both US semiconductor firms and the educational and career trajectories of individuals with relevant skills.

The results are striking. We find that US chip manufacturing firms experienced a 9% reduction in hiring activities and a 3% decrease in overall workforce size for science and engineering positions compared to other job categories within the same firms. This translates to an annual loss of 2,285 science and engineering positions in the US chip manufacturing sector. Between 2019 and 2022, this amounts to a cumulative reduction of 9,140 jobs in an industry that employed 66,382 engineers and 9,768 scientists during this period.

The decline in hiring is particularly acute for entry-level and junior positions, indicating that protectionist policies have disproportionately affected those new to the workforce. This trend is especially concerning given the industry’s need for fresh talent to drive innovation and growth.

Furthermore, our analysis of educational cohorts reveals a significant shift away from chip manufacturing careers. We observe a marked decrease in the number of US students graduating with skills relevant to chip manufacturing. In 2017, there were 65,290 undergraduates and 39,019 postgraduate students in relevant programmes. By 2022, these numbers had plummeted to 12,311 and 20,503, respectively.

We find that US semiconductor firms have responded to these challenges by increasing their recruitment of experienced workers outside the US. There was a 3% increase in hiring for both junior and mid-senior roles in international segments of these companies. Countries benefiting from this shift include Canada, which strategically amended its immigration policies to welcome more foreign engineers and scientists, as well as European nations with established chip manufacturing industries, such as the Netherlands.

These findings have profound implications for the success of initiatives like the CHIPS Act. The Semiconductor Industry Association (2023) projects a need for 115,000 new semiconductor jobs in the US by 2030. Based on our estimates, it could take approximately 16 years to fill these positions at current graduation rates. This talent shortage could seriously impede the industry’s growth and the US’s ability to achieve semiconductor self-sufficiency.

Our research underscores the relationships between trade policies, immigration, and workforce development. While protectionist measures were intended to boost domestic manufacturing and employment, they appear to have had the opposite effect on the semiconductor industry’s talent pipeline. Recent research by Bosone et al. (2024) shows that geopolitics began significantly affecting global trade after 2018, aligning with the US-China tariff war and coinciding with the timeline of our observed talent crunch in the semiconductor industry. Their study also found evidence of ‘friend-shoring’ in trade patterns, suggesting that geopolitical considerations are reshaping not only supply chains but, potentially, talent flows as well, further complicating the semiconductor industry’s access to global skill pools. This highlights the need for a more thoughtful but fast approach to industrial policy that considers the global nature of the semiconductor workforce and the importance of maintaining open channels for talent acquisition and development.

To address these challenges, policymakers could consider several key actions:

1. Re-evaluate immigration policies: Implement targeted visa programmes, such as the proposed ‘Chipmaker’s Visa’, to attract and retain international talent in the semiconductor industry.
2. Boost domestic STEM education: Increase investments in educational programmes and initiatives that encourage more domestic students to pursue careers in chip manufacturing and related fields.
3. Foster industry-academia partnerships: Encourage closer collaboration between semiconductor companies and universities to ensure curriculum alignment with industry needs and provide more internship and research opportunities.
4. Develop retraining programmes: Create initiatives to help workers from other industries transition into semiconductor manufacturing roles, tapping into a broader pool of potential talent.
5. Incentivise talent retention: Implement policies that make it more attractive for skilled workers to remain in or return to the US, such as tax incentives or student loan forgiveness programmes for those who commit to working in the domestic semiconductor industry.
6. To bridge the talent gap and secure a long-lasting competitive edge in chip manufacturing, prioritise investments that integrate AI into this sector. Coordinate the proposed ‘Chipmaker’s Visa’ programme with supplementary initiatives that link chip manufacturing and AI development.

The success of America’s semiconductor renaissance hinges not just on building new fabrication plants (‘fabs’) and securing supply chains, but on cultivating and sustaining a skilled workforce. Our research serves as a cautionary tale about the unintended consequences of protectionist policies on talent development and retention. As the global competition for semiconductor supremacy intensifies, the nation that best nurtures and attracts top talent will likely emerge as the leader in this critical industry.

The path forward requires a delicate balance between promoting domestic capabilities and maintaining the global interconnectedness that has long been a hallmark of the semiconductor industry. By addressing the talent crunch head-on with targeted, forward-thinking policies, the US semiconductor industry can work towards realising the full potential of its ambitions and securing its technological leadership for decades to come.

See original post for references