The Truth About the Coming Labor Shortage

Confusing predictions and data are clouding the real picture of tomorrow’s labor supply.

By Robert J. Grossman March 1, 2005

HR Magazine, March 2005It’s a well-accepted fact that the population growth rate for the United States is slowing down. Between now and 2010, the U.S. population is projected to grow 1.1 percent annually, identical to the rate a decade earlier. After that, it will dip, eventually reaching 0.3 percent by 2030, even less by 2050.

While these numbers are widely known and accepted, what’s far less certain is what they will mean for employers hoping to avoid an ultra-competitive labor market in the short term.

Doomsayers rely on such demographic data, as well as employment projections from the U.S. Bureau of Labor Statistics (BLS), to determine that as early as 2010 there won’t be enough workers available to staff the nation’s jobs. But such predictions often are flawed or fail to take into account a full view of the facts.

Balance out the competing views and data, and a different, sometimes less gloomy, view of the future emerges—at least for some employers. Will you be one of the lucky ones to dodge the bullet? Or will you face a near-term shortage of talent? And, if so, what can you do about it?

The time to address this issue is now. Many employers will be negatively affected by the future labor market but to varying degrees. Those who will face the tightest competition for labor can take steps now to help create a brighter future.

Projections Miss the Mark

Predictions that the total labor supply won’t keep up with the total demand are off base, according to sources at BLS. Such predictions generally are based on subtracting estimates of the total number of future workers from the total number of expected jobs. The resulting calculation shows that by 2012, there will be 3.3 million fewer workers than jobs.

But there are numerous flaws with that math. Most significantly, the two data sets involved, both of which are supplied by BLS, are derived from different sources and cannot be compared accurately. To subtract one from the other is to make an apples-and-oranges comparison that is invalid and misleading.

Michael Pilot, BLS’s division chief for occupational outlook, says anyone who subtracts one data set from the other and finds a gap is “totally misrepresenting” the data. He says BLS has “tried to correct the misconceptions with press releases and in an article in the Monthly Labor Review” in February 2004.

But, to date, the agency’s efforts have been to no avail. “Our data are in the public domain; people use it and misuse it,” says Pilot.

What’s more, the BLS data have limitations that often are not taken into account. For example, the data representing the total number of jobs rely on surveys in which employers project their job needs years into the future. But such estimates are far from perfect.

“Don’t bet on employers’ accuracy in predicting future needs,” says Peter Cappelli, director of the Center for Human Resources at the Wharton School in Philadelphia. “Most employers have business strategies that go out only a year or two, so how can they predict [far into the future]?”

Further, the BLS numbers don’t take into account the fact that some individuals hold more than one job, so they effectively overestimate the number of workers needed to staff the nation’s jobs.

Finally, there is a large pool of labor that employers have, to this point, been reticent to tap—and that doesn’t show up in BLS labor force projections. Those who have become so discouraged that they have stopped looking for work, for example, aren’t reflected in BLS labor projections. Neither are skilled individuals with disabilities or those, such as parents or older individuals, who are willing to work, but only on a flexible or part-time schedule.

Even without all these mitigating factors, the number of available workers still will exceed the number of jobs. But this alone is not cause for celebration because it means only that there will be more warm bodies than jobs, not that every job will have one or more qualified employees available to fill it.

Shrinking Labor Layer Cake

To visualize what the relative decline in the skilled labor force will mean for employers, think of the total universe of applicants as a multilayer cake where the top layer represents the best applicants and the bottom layer the worst.

As the cake becomes smaller (relative to demand)—which it soon will—each layer becomes smaller. So, while the total number of applicants will exceed the total number of available jobs, the number of top-layer, skilled employees will shrink, spurring greater competition for these most qualified workers—and even for the less skilled individuals below them.

The problem for employers is that while the cake as a whole is shrinking (again, relative to demand), the top layer in particular seems to be waning. The reasons are twofold: education and immigration.

Education. U.S. efforts to groom homegrown talent for the work challenges of the 21st century aren’t panning out. Middle- and high-school students fare poorly on international comparisons of math and science achievement. Even in basic English, more than 60 percent of employers rate high-school graduates’ skills as fair or poor. In postsecondary education, more than half of all entering college students never graduate. “U.S. schools are not tough enough to meet global standards,” says William Rothwell, SPHR, professor of workforce education and development at Penn State University in University Park, Pa. “Americans are incredibly ignorant about the challenges they face in the global market.”

Improvements aren’t likely to take effect anytime soon. Although observers in business and government are calling for a Marshall Plan to rethink the education system, it will take a consortium of corporations, universities and government to make that happen.

Immigration. In part, employers have worked around the limitations of our nation’s education system by importing immigrants. Over the past 20 years, immigration has been at or beyond the highest historical levels, making the United States the largest importer of international labor. With 20 percent of the industrialized world’s population, the United States absorbs more than 50 percent of the flow of international labor.

But there is evidence that the influx of foreign-born talent to this country is slowing, perhaps for good. In particular, there is anecdotal evidence that the highest-level immigrants no longer want to come here.

One factor slowing immigration is that H-1B visas are harder to come by. The number of available visas, set at 195,000 per year during the tech boom, has been cut to 65,000. And competition is heated. For fiscal year 2005, all 65,000 visas were snapped up on the first day of availability. (Visa applications were accepted ahead of time.)

In addition, post-Sept. 11 immigration rules and procedures are delaying visa approvals, sometimes adding months to the process and making it more burdensome. In particular, those with high-demand skills may face delays and difficulties. Visa applicants who possess skills on the Technical Alert List—which includes skills that can be used to harm Americans, such as certain types of highly prized engineering—will draw added attention and scrutiny from immigration officials, causing further delays. (For more information, see “Unwelcome Changes” in the February 2005 issue of HR Magazine.)

The cause of such increased security—the threat of terrorism—also is making foreign workers leery of coming to the United States. At the same time, other nations are becoming more attractive to workers of all kinds and are drawing immigrants away from the United States.

Even U.S. higher education institutions, which have dominated the world market for foreign students—who often stay post-college to work in the United States—are reporting substantial drop-offs in foreign enrollment. Some losses are attributed to visa problems. But competition from overseas is a significant factor, says Penn State’s Rothwell.

“Conditions are getting better in the underdeveloped nations. Why would people, particularly young people, leave their homeland when they can get what they need in their own backyard? More and more people are coming here and going home again where the standard of living is good. Upper tiers of education in these countries are improving,” he says.

In such an ultra-competitive environment, top organizations have a distinct advantage. “It’s a safe bet that foreigners still will want to come here to go to Harvard, Stanford and other top-tier universities,” says Rothwell, “but beyond that, who knows?”

Only the Strong Survive

Rothwell’s observation about universities holds true for employers as well. “Blue chip” employers of choice—like GE, The Hay Group and Ford—will be able to recruit the best and brightest, siphoning off top workers from competitors, Rothwell adds.

By contrast, even the best employers in sectors that historically have trouble attracting talent—such as government and education—will have more difficulty than ever recruiting top-notch replacements, in part due to competition from overseas.

Competition for labor will be especially heated for certain types of jobs. According to BLS, demand for every occupational group is projected to grow, but demand for 19 high-skilled groups in particular is slated to soar by at least 40 percent. (See "Fastest Growing Occupations")

Skills Gap

The real gap, then, involves selected skills, not head counts. The question is not whether there will be enough workers, but whether there will be enough qualified workers on U.S. soil to do the work at an acceptable cost.

“There’s a large segment of workers and potential workers that are behind the eight ball. They don’t possess the skills that employers need,” says Justin Heet, a consultant with the Hudson Institute in Indianapolis and author of the Hudson white paper Beyond Workforce 2020: The coming (and present) international market for labor (2004). That’s a problem some employers are already experiencing.

“We’re finding fewer and fewer native-born workers available to us with the skills we need,” says Gary Cluff, corporate recruiting manager for Mitre Corp., a not-for-profit company in McLean, Va., that provides systems engineering, research, development and information technology support to the federal government. “Those who are responsible for recruiting and staffing are saying, ‘Oh my, what are we going to do?’ ”

Other employers will face a similar skills gap, predicts Heet. “We’re rolling into the most severe shortage of skilled workers that this country has ever seen,” he says. “The 90s will pale in comparison to how bad the labor picture is going to be.”

And that will put tremendous pressure on HR to find and recruit top-notch candidates, says Gerry Crispin, SPHR, principal of Career Xroads in Kendall Park, N.J., and former director of HR for Johnson & Johnson in New Brunswick, N.J.

Rapid Responses

What can HR do? First, accept that no matter the size of your company, you need to know what’s happening globally—then think locally.

“If you’re not studying the literature and haven’t done an environmental scan, you won’t know what’s coming down,” says Michael Losey, SPHR, CAE, a consultant and former president and CEO of the Society for Human Resource Management. “Knowing what the issues are and how they apply to your organization is what’s important.”

Then conduct a careful analysis of your own situation. George Krock, director of human resources, planning and development, at PPG Industries in Pittsburgh, says employers must move beyond the big–picture prognostications to a more narrowly focused view.

“Our world is microeconomics, not macro,” he contends. “Look at your markets, your organization and what it needs. The things that are happening nationally or globally may not apply to you. Decide whether you’re facing a talent shortage or not. Focus on your business, on the skills you’ll need, the folks you have now and in the pipeline.”

And don’t panic. “I don’t buy into the Chicken Little theory, at least not for PPG,” Krock says. “We’ve got 50 locations in the United States and there’s not one where we anticipate trouble manning our facility. These scare tactics look like a bunch of consultants trying to build their businesses up.”

Krock may be right, at least for his particular situation. PPG is a multinational manufacturer, and, of the 20 industries expected to lose the most jobs between 2002–2112, 13 are in the manufacturing sector. (See Most Job Losses.)

Action Steps

When you complete your analysis, there are some logical actions you may want to consider. By themselves none is a panacea, but in combination they can be powerful tools.

Invest in older workers. As the baby-boom generation ages, the number of people in the labor force aged 55 to 64 will grow by 51 percent, more than four times the average for all age groups. The number of workers aged 65 and over also is expected to grow by 51 percent.

“Folks who may have been marginalized in your organization, or at least think they have, will have options other than retirement,” says Tom Casey, a principal in HR and IS at Mellon Financial in Boston. “What are you planning to do to hold on to them and their knowledge?”

Some say older workers in large numbers will respond to senior-friendly redesigned work, flexible schedules and phased retirement. “We need to focus on people into their 60s and 70s, adjusting our concepts of work to keep them actively engaged,” says John Challenger, CEO of Challenger, Gray & Christmas in Chicago.

But Losey says that relying on older workers to remain healthy is problematic. “The United States has the lowest healthy life expectancy among industrialized nations, ranking 24th on the World Health Organization’s life expectancy list. We’re the only major country to have an estimated healthy life expectancy of less than 70.”

In the end, it’s difficult to predict how many workers actually will want, or be able, to stay on. That’s what Ed Boyles, manager of workforce planning for the Tennessee Valley Authority (TVA), discovered. TVA won a 2003 HR Magazine Innovative Practice Award for effectively transferring knowledge from departing older workers to younger ones.

“Lots of folks nearing retirement don’t want to phase out; they just want to leave,” says Boyles. “So we’re focusing on filling the pipeline, recruiting entry-level professionals and encouraging our senior people to transfer knowledge to them before they leave. We’re finding them very helpful; they want to leave a legacy.”

Promote diversity. As the labor market tightens, the social justice arguments for diversity will be bolstered by a heavy dose of economic necessity. “It’s always been an issue of fairness, but it’s also bad business not to pursue policies that attract the widest segment of the population,” Heet says. “And you don’t want to single out one segment of the labor force; you have to be attractive to as many workers as possible.”

Today’s approaches to diversity need broadening, Challenger says. “We focus too much on black/white issues, and neglect people who come from countries and cultures we want to do business with.” Businesses need to fast-track immigrants into key management positions so they can open dialogues with businesses in their native countries, he says.

Employers also may need to broaden diversity initiatives to include the potential treasure trove of workers who have withdrawn from the workforce and are not included in the unemployment statistics. Many have significant skills and education and want to work, says Robert Walker, president of Get America Working, a nonpartisan employment policy group in Arlington, Va.

According to BLS, in addition to the 8.2 million Americans who are officially unemployed, more than 75.7 million Americans of working age are not participating in the labor force. Another 24.2 million are part-timers who may be interested in boosting their hours. Among them: older workers who retired early, stay-at-home parents who would work if employers offered more family-friendly policies, discouraged workers who have given up looking for jobs and people with disabilities.

Build your brand. For some industries, the labor crunch arrived early. For example, health care providers have been competing madly for years to find nurses, pharmacists, and other professional and technical staff. The winners, like Lancaster General Hospital in Lancaster, Pa., offer important insights.

Ned Albee, Lancaster’s senior vice president of HR, first brought the shortage issue to the hospital’s board in 1988. They formed a strategic planning committee and made recruitment and retention priorities. “We knew the competition for good people would be intense,” he says. “We were prepared to fight for our share.”

The strategy has been to build a brand that identifies Lancaster General Hospital as an employer of choice. “We want to be the best place to work, with a management team you have confidence in, where you can enjoy job stability and opportunities for growth,” Albee says. How? Gain external recognition.

Lancaster General has been rated one of 80 magnet hospitals by the American Nursing Association; is rated one of the top 100 U.S. hospitals by the Solucient Institute, a company that provides data and statistical analysis to the health care industry; and ranks as one of the 50 best large employers to work for in Pennsylvania. Turnover rate is 12 percent, compared to the industry average of 17 percent.

Invest in training, development and continuing education. In addition to keeping current with technology, the growing importance of knowledge-based work favors strong nonroutine cognitive skills, such as abstract reasoning, problem-solving, communication and collaboration. As retention becomes more crucial in the talent wars, HR will need to earmark greater resources to continuing education through training, schooling and knowledge transfer.

Best practice organizations, like TVA, are formalizing coaching and mentoring to capitalize on the experience of older workers. Some, like Mitre Corp., have their own in-house university, providing retraining, upgrading and continuing education. “When you hire a college graduate, his or her skills become stale in a year or two,” Cluff says. Mitre offers courses in the latest programming skills and Java techniques as well as in time management and interviewing techniques.

Some organizations, like Lancaster General, are wary of counting on outside institutions to recruit and train talent they need. Lancaster General has learned the best way to ensure a steady stream of nurses is to grow them itself. The hospital’s nursing school provides a steady pipeline for its nursing staff of 1,000. “Forty percent of the nurses who work here, trained here,” Albee says.

Looking to the future, Lancaster General is collaborating on community-based educational programs and publicity campaigns. “If you don’t start making interventions on the education side, high-school graduates won’t select health care,” Albee says. The hospital sponsors a joint program with local schools that exposes students to health care careers and practitioners, and that includes training opportunities. They’ve instituted an advertising campaign that’s being copied by other industries, like construction and cabinetry.

In the End

Undeniably, changes in workforce composition and capabilities are right around the corner. What effect they will have on specific organizations remains to be seen.

At least BLS officials and other observers hold out a ray of hope: They say no matter how dire the picture, our free market economy always finds a way to adjust to the demand for labor; this time will be no different. But such optimism may be little consolation to HR professionals who recall the heated competition for labor in the late 1990s and who must bear the burden if such predictions are wrong or take a long time to develop. Another possible bright spot might involve offshoring, whereby U.S. employers can tap overseas labor markets. (See Play Your Ace in the Hole.)

But for HR professionals, there appears to be only one fairly safe bet: While it may vary by degree depending on the industry and employer, competition for human capital seems destined to become more cutthroat.

Still, “too many employers haven’t thought it through, saying they’ll worry about it when it happens,” Heet says. “If you wait, you’ll get caught flat-footed. The time to plan is now; you can’t do it overnight.”

Robert J. Grossman, a contributing editor of HR Magazine , is a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.

Professional Pointer 1

Employers risk legal liability if they arbitrarily reject deficient certification if the deficiency can be cured within a reasonable time and with reasonable effort. For example, one state court held that an employer violated the FMLA when it failed to inform an employee that a “return to work slip” was inadequate to support a request for FMLA leave and failed to provide an opportunity to cure the deficiency.

Professional Pointer 2

Employers outside the 10th Circuit should recognize that other courts could review the same issue and reach an opposite conclusion. Note also that the 10th Circuit indicated that the “joint employment” regulation is valid as applied to employees of temporary help agencies. That is, for an employee who works at various changing locations through a temporary agency, the “worksite” would be the temporary agency’s office.

Professional Pointer 3

The employer dodged a bullet in this case. The only reason the board remained unscathed is that Hanger filed suit too late. The board should have returned Hanger to her former position following her pregnancy leave. If unsatisfied with her performance, it could have followed its normal procedures for dealing with poor performance.


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