The American job market is on the cusp of a significant transformation. As AI integrates into businesses, companies are re-evaluating their hiring practices. The traditional emphasis on degrees and years of experience gives way to focusing on specific skills. This shift comes as organizations deal with rapid technological advancements and a changing economic outlook.

Not only are we expecting a cooling trend in salary increases, but we are also looking at a labor market in a transition. There’s a growing interest in skills-based hiring, especially in technical roles. A recent report from Test Gorilla found that 88% of tech companies use skills-based hiring to recruit new talent. Additionally, 89% of tech managers are happy with their skills-based hires in the past year.

Switching to skills-based hiring has clear benefits, especially with AI. But, adopting this new approach in companies is easier said than done. Leaders and hiring managers across all sectors are finding that there’s much work to do to prepare their organizations for this shift.

Evolution of the Traditional Market From Jobs-Based to Skills-Based

Employers have heavily relied on college degrees and years of experience for decades to indicate a candidate’s potential and abilities. However, a new paradigm is challenging this long-standing approach. It prioritizes specific skills over formal education. Job descriptions kept including the requirement of a higher education degree, even if the job duties didn’t require it, leading to companies passing on talented candidates who could contribute to their future success.

In a tight labor market where only 7.2 million unemployed workers are available to fill about 8.1 million job openings in the U.S., skills recognition and removal of college degree requirements have been greatly considered among employers to harness the untapped pool of talent previously overlooked.

Another catalyst for this change is due to rapid technological advancements, particularly in artificial intelligence (AI) and automation. Organizations are altering job roles faster than traditional education systems can adapt. This has led to a persistent skills gap, with employers consistently reporting difficulty finding workers with the right capabilities despite high numbers of college graduates entering the workforce each year.

Also, there’s a growing belief that degree requirements can exclude talented people from underrepresented backgrounds. These individuals, mostly Black, Latino, veterans, or rural residents, often lack access to traditional higher education. This hinders efforts to improve equity and diversity in the workplace.

The changing nature of work itself is also driving this shift. The rise of the gig economy and project-based assignments demand a more flexible, skills-oriented approach to talent management. Organizations are evolving. They’re moving from fixed structures to flexible ones. They’re shifting from fixed jobs to matching skills to work. They’re also moving from owning all capabilities to using a mix of built, shared, and rented skills.

There are signs that skills-based hiring is fast gaining momentum, as fourteen states in the U.S. have all dropped degree requirements for state jobs. In fact, the federal government has encouraged skills-based hiring in specialty areas such as cybersecurity, affecting 100,000 federal workforce jobs. Additionally, according to a report from Havard Business School and Burning Glass Institute, the annual number of job postings that removed degree requirements has quadrupled between 2014 and 2023.

Benefits of Skills-Based Hiring to Both Employers and Workers

For employers, one of the primary benefits is access to a larger talent pool. Removing the four-year Bachelor’s degree requirement can help. It will let companies consider more qualified candidates for some roles. This should improve retention and cut turnover costs.

For job seekers, skills-based hiring can open new doors. It can create opportunities that were once out of reach. This is particularly significant for workers who have been traditionally underrepresented in certain industries or occupations. Many talented individuals with relevant skills lack a four-year degree. HR systems often screen them out using degree requirements as a filter.

In practice, these benefits can be realized when combined with robust training programs. By providing on-the-job training, employers can tap into a wider talent pool. It also ensures that new hires develop the specific skills needed for their roles. This approach not only fills immediate job openings but also contributes to long-term workforce development.

Furthermore, skills-based hiring can contribute to increased diversity in the workforce. By focusing on skills, not degrees, organizations can improve hiring. This will help their hiring be fairer and include more qualified candidates from underrepresented groups. It will also boost economic growth and social mobility.

Possible Challenges of this New Approach

The transition to a skills-based market comes with challenges. MMany hiring managers and HR systems still favor degrees and traditional resumes. Adopting a skills-based model requires new ways to assess and validate candidates’ abilities. This can be particularly challenging when it comes to soft skills like leadership, creativity, or adaptability, which are increasingly valued but harder to quantify.

According to the Burning Glass Institute, for every 100 job openings that removed degree requirements, fewer than four more non-degreed workers were hired. This suggests that removing degree requirements does not guarantee more diverse or inclusive hiring. Possible causes of this gap are: unconscious bias, poor skills tests, or a mismatch between training and actual job needs.

The other challenge is the gap between training and employment. As noted in the case of San Antonio’s Ready to Work initiative, less than 50% of program participants were placed in jobs within six months despite receiving intensive case management and job training. This shows the difficulty in turning skills into job placements, even with a solid effort to do so.

The Role of AI in Reshaping the Hiring Approach

While AI and automation drive the need for new skills, they can also provide tools to implement skills-based hiring more effectively. AI can help organizations identify and categorize the skills needed for various roles. AI can also match candidates’ skills to job requirements more effectively than traditional resume screening and even power learning platforms to help employees acquire new skills.

As we look to the future, several trends are likely to shape the continued evolution of the job market. The emphasis will likely shift from one-time degree acquisition to continuous learning throughout one’s career. New forms of skill certification, such as digital badges or micro-credentials, may gain prominence as alternatives or supplements to traditional degrees. Career paths may become more fluid, with progression based on skill acquisition rather than time spent in a particular role.

The ability to work effectively alongside AI systems is also likely to become an increasingly valuable skill, regardless of industry. As AI takes over more routine tasks, human workers must focus on areas where they can add unique value, such as complex problem-solving, creativity, and emotional intelligence.