The Surprising Specter of Labor Shortages, and What It Means for Employers

The labor market loosening in the US over the past 18 months—along with the specter of genAI automating knowledge-worker jobs—has released some of the intense pressure on managers around hiring, retention, and compensation. But the current moment—where workers are easier to hire, pressure to raise wages has decreased, and employees aren’t job-hopping—is likely more of a temporary respite rather than a long-term trend, according  new research released yesterday by the McKinsey Global Institute. 

If McKinsey is right, in years ahead employers will have trouble finding enough workers and wage inflation will pick up again. “You can catch your breath, but then be prepared for the next wave of tightness,” says Anu Madgavkar, partner at the McKinsey Global Institute. Here are key takeaways from the new analysis by Madgavkar and her McKinsey colleagues:

• The trend is further tightening rather than loosening. Lower birth rates and reduced immigration have decreased the growth of the available labor supply, and US businesses since 2010 have pulled most employable people into the workforce. “The United States is amongst the most tight of all these economies” that McKinsey studied, according to Madgavkar. “What was a surplus of over 12 million workers back in 2010 relative to demand has now become a deficit of almost 2 million workers.” There are relatively little labor reserves to support growth.

• Despite AI and automation, demand for knowledge workers should remain strong. Madgavkar believes that AI will help address the worker shortage by automating at least parts of jobs. But she’s not expecting a scenario where AI absorbs so much knowledge work that labor shortages go away. She notes that the occupational categories growing the fastest typically require more education. “They are healthcare. They are the science, technology, engineering, math—the STEM category of jobs—and they are business, legal, and managerial professions,” she says. All the same, McKinsey has estimated that roughly 30% of the work hours in the economy can be automated by 2030. And some other economists differ from McKinsey, foreseeing a major drop in knowledge jobs such as those in law and management as a result of genAI. 

• Demand could be even stronger for jobs involving manual work. “We find that it's actually the whole bucket of physical and manual skills, skilled trades, occupations in healthcare, health aides, for example, occupations in construction, all kinds of building and maintenance type of work,” explains Madgavkar. Jobs requiring physical and manual skills had the biggest increase in vacancies since 2015 among skill categories McKinsey tracks. 

Source: McKinsey Global Institute’s “Help wanted: Charting the challenge of tight labor markets in advanced economies”

• Organizations can stay ahead of the trend by focusing on retaining and training their employees and tapping new pools of workers. Workplace arrangements such as flexible schedules, child-care support, and internal mobility programs can help employers attract caregivers, older workers, immigrants, and others. Madgavkar notes that research shows that people are drawn to work at companies where they feel there is a purpose and where they experience career growth and advancement. She also believes businesses need to find ways to increase productivity, including through automation, to continue to grow amid labor shortages. 

Read the McKinsey Global Institute report. Read a transcript of our conversation with Madgavkar.

Written by Kevin J. Delaney.

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