The Future Labor Shortage

Since the late 1990’s, many in our profession have been consumed with the potential for a cataclysmic labor shortage in the U.S. We’ve all seen the numbers: a predicted 10 million worker shortage in 2010, and up to 35 million shortage by 2035. Will a combination of aging population demographics, a growing economy, and fewer qualified workers to fill the void cripple our economy and make labor a scarce commodity? Or will increases in offshoring, immigration, productivity, and delayed retirements mitigate a potential crisis? Behind the Numbers There is an incredible amount of data that gets factored in to labor force projections. The most comprehensive source on labor supply is the Bureau of Labor Statistics (BLS), which uses a combination of census and labor force data. The BLS projections estimate that workers age 55 and older will continue to increase as a percentage of the population well into 2050. Over the next seven years, the annual growth rate of the 55-years-and-older group is projected to be nearly four times that of the overall labor force. In 2011, the first boomers hit the accepted retirement age of 65. By 2030, the Baby Boomers will all be between the ages of 66-84.


Figure 1. Civilian Labor Force (Source: Bureau of Labor Statistics)

Statistics Canada (our neighbors to the north have some of the same demographic challenges as the U.S.) presents the best visual representation of this phenomenon:

Figure 2. The aging of the baby boomers (Source: Statistics Canada)

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Other statistics paint a frightening picture as well:

  • In 2002, 12.4% of the U.S. population was 65 and older. Over the next 30 years, this proportion will rise to 20%.(Source: Bureau of Labor Statistics)
  • There are 39.4 million people in the 26-35 age group versus 44.2 million in the 36-45 age group. (Source: Employment Policy Foundation)
  • The aging population is a global phenomenon. Other countries with similar predicaments include Russia, Germany, the UK, Japan, France and Spain. (Source: Employment Policy Foundation)
  • Over 50% of boomers lived in the following nine states (in 2000): California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan and New Jersey. (Source: MetLife Mature Market Institute)

Do these statistics point to an imminent shortage as Baby Boomers start to retire? Mitra Toossi, an economist at BLS and the author of “A Century of Change: the U.S. Labor Force, 1950-2050,” is quick to point out that it is not the BLS’s role to predict shortages: population and labor demographics alone do not make for a labor shortage. There is also a demand side of the equation. Will our economy continue to grow at its current rate, and will the need for workers increase along with it? Or will gains in efficiency ó possibly achieved through offshoring, increased hours, and/or automation ó bridge the gap? The Viewpoints In economic circles, the labor shortage is a highly contentious issue. Simple supply-versus-demand economics says that a slowdown in labor supply growth coupled with increasing demand may spell disastrous labor shortages over the next three decades, which could seriously restrain our economy. Janemarie Mulvey, president of the Employment Policy Foundation, and Stephen Nyce, research associate at Watson Wyatt, agree that a severe labor shortage is indeed imminent ó unless we do something about it. According to a study they completed in 2004, this labor shortage could reach 18.1 million workers in 2020 if current economic trends continue. In speaking with Nyce, he adds that our country has the capacity and economic freedom to adapt to such a shortage, but not without potentially major sacrifices to our standards of living. An alternative viewpoint is that demographics play a limited role in labor shortages, as the IT worker shortage of 1999 and 2000 shows. In this view, labor is primarily an economic phenomenon driven by changing consumer behavior. Peter Capelli, director of Wharton School’s Center for Human Resources, admits that there may be challenges ahead for HR departments. But, he says, these challenges will be driven by economics, not demographics. There is already an abundant supply of labor that is either not currently participating in the labor force or unemployed: even now, the economy is not currently at full employment. He goes on to say that many challenges faced by HR departments are really of their own creation: jobs are too specialized, requirements are too narrow, and turnover is too high, because companies don’t do a good job identifying, selecting, and retaining the best performing employees. “It is safe to say that the greater mobility of labor and the greater pressure to hire from the outside have increased the labor market challenges that human resource departments have to manage independent of the state of the economy,” says Capelli. Nyce counters that demographics do matter: you have to have the workers to produce goods and services and they have to be productive. “The economic growth rate in the economy is the simple sum of the rate of growth in the labor supply and the rate of improvement in labor productivity,” he says. Many human resource professionals would argue that there are enough unqualified workers in the labor pool today that it is not likely that new entrants from the existing pool would solve what is essentially a quality, not a quantity, gap. Potential Solutions? A common argument against the labor shortage is that we will fill in any potential gaps with sounder human resources policies. Peter Francese, founder of American Demographics magazine, says that a combination of offshoring, automation, rising immigration, and the later retirement of Baby Boomers who want to keep their standards of living high make a labor shortage “incredibly unlikely to happen.” Roger Herman, president of The Herman Group and author of “Impending Crisis: Too Many Jobs, Too Few People” presents several counterarguments. First, offshoring has disadvantages, he points out. Many companies that have been frustrated by the lower work standards, language barriers, and lack of teamwork in other countries have started pulling some of their offshore labor back to the U.S. Second, immigration has become more complicated in a post-9/11 world. Countries with surplus labor are not likely to have the skills we require due to less advanced education systems, and there could be undesirable social and cultural issues created by a massive inflow of immigrants. Finally, the Baby Boomers will not retire as early as previous generations, but there is only so long they can work. They will likely expect a change in lifestyles (more part-time than full-time), and the increases in their rates of workforce participation needed to make a dent in the shortage would have to be very significant (90-120% increases in some five-year age brackets according to some estimates). Conclusions and the “Big Ifs” Putting all of the numbers aside for a moment, it is clear that nobody can predict exactly what will happen in the future. Beyond labor supply and demand, there are other unpredictable factors, such as major wars or social upheavals, changing work patterns, global health epidemics, and trade policies. It is also anyone’s guess whether the massive productivity gains we’ve seen over the past few years will continue ó and of course the theories abound. If productivity gains do continue, not many would argue for a labor shortage. If it turns out that the last few years were an aberration and productivity gains return to their historic levels, we could see a labor shortage of epic proportions that will constrain our economic growth and lower our standards of living. There is common ground in the debate. Regardless of the root causes, both sides agree that human resources will face some much larger challenges in the coming years unless policies around worker selection and retention change. Organizations that do a better job finding and deploying their human capital can increase productivity and be better positioned to succeed in the face of new labor market realities. Workforce planning and building pipelines for future hiring needs ó instead of reacting to openings when they are already beyond mission critical ó can help employers stay one step ahead. And strategies to retain older workers without sacrificing some of the benefits of retirement can be put in place, whether they are specific to certain industries like healthcare and engineering that have aging populations, or more widespread. Whatever the future holds, we need people, processes, and technologies to work in concert to help us not only plan to get the right people on board but also ensure that they are in the right seat, on the right project, and recognized for their contributions. We also need to build in the flexibility to adapt. The biggest risk I see for our policy makers, our companies, and our human resources departments is a lack of preparation and long-term thinking, which should include preparing for the worst case scenario.

Dave Lefkow is currently the CEO of talentspark (www.talentsparkconsulting.com), a consulting firm that helps companies use technology to gain a competitive advantage for talent, and a regular contributor to ERE on human capital, technology, and branding related subjects. He is also an international speaker on human capital trends and best practices, having spoken in countries as close as Canada and as far away as Malaysia and Australia. His consulting work has spanned a wide variety of industries and recruiting challenges with companies like Starbucks, Boeing, HP, Microsoft, Expedia, Washington Mutual, Nike and Swedish Medical Center.

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