The Stagnant Labor Pool

Leaders in India’s information technology industry a decade ago came to a stark realization: They didn’t have enough skilled workers to keep pace with the growing demands of the Information Age. What to do?

They decided it was high time to get more involved in public education and training. They began shaping the curricula at engineering colleges and providing on-campus training to ensure students got the skills they needed. In short, says Anu Madgavkar, a senior researcher at McKinsey Global Institute, “the IT industry’s talent supply improved dramatically.”

The story, as recounted by Madgavkar, is instructive: All companies must adapt to the changes in the evolving global workplace, devising ways to produce more skilled labor, or pay the price in lost productivity and profits.

Over the past decade, but especially in recent years, McKinsey and other management consultants have been sticking their collective fingers in the global talent pool and finding it lukewarm to the touch. Indeed, they believe a critical skills gap already exists in many countries, a situation likely to worsen in the coming years if current trends persist. If industries and governments don’t intervene, there will be too few high-skill workers and not enough jobs for medium- to low-skill job seekers in just a decade.

It’s not a pretty picture.

High unemployment. Beset by financial crises, many countries are plagued with high unemployment, yet a third of employers worldwide say they cannot fill mission-critical positions. In the manufacturing sector alone, some 10 million manufacturing jobs are vacant because of a growing skills gap. In the long run, chronic unemployment could become the norm.

Skills Shortages. By 2020, employers could face a shortage of up to 40 million highly skilled workers, or 13% of the global demand for such workers. At the same time, analysts project that 140 million medium- and low-skill workers will not be able to find jobs, including nearly 60 million low-skill workers in India.

Aging Populations. The talent gap will be exacerbated by an inevitable event—old age. By 2030, McKinsey concludes, 360 million older people will have left the global labor market. Japan is the most striking example of the trend. According to a government report, nearly 32% of Japan’s projected population of 115 million will be 65 or older by 2030.

Education Shortfall. Education standards are insufficient and a major contributor to the talent gap—a point hammered home in repeated management surveys and studies. The issue is complicated, but clearly governments and employers need to work more closely with educators and young people to ensure that students develop the skills to succeed in the workplace.

Sustaining Growth. Looking inward, just to sustain economic growth, the United States must add 25 million workers to its talent base by 2030. Western Europe will need 45 million more workers. Even China, which supplies more than a quarter of the world’s work force, according to the McKinsey Global Institute, will face shortages. From 1980 to 2010, according to the institute, China’s non-farm labor force grew by 315 million to around 475 million and now accounts for 60% of the total labor force.

The Great Recession has knocked many countries to their knees, even the most prosperous. Across the globe, men and women of all ages are pounding the pavement looking for work. Many simply give up. Youth unemployment is fast approaching crisis proportions. In the United States, the jobless rate remains near 8%. Eurostat, the European Union’s statistics office, pegs unemployment in the 17 eurozone nations at nearly 19 million people, or 11.8% of the labor force. Spain, at 26.6%, and Greece, at 26%, have the highest unemployment rates in the eurozone. Those countries, along with Italy, Cyprus, and Portugal, remain in the throes of recession.

But even as the global economy improves, those without the skills needed for the jobs of the future will be left behind. Management experts say that finding a global solution to the skills gap is imperative if business is to remain competitive and economies are to grow. The keys to the future: improving and increasing access to education and job training; providing more flexible working environments; allowing for increased worker mobility; developing competitive labor strategies; encouraging innovation and business creation; and utilizing the abilities of workers at all skill levels.

“We are entering the era of unparalleled talent scarcity, which, if left unaddressed, will put a brake on economic growth around the world,” wrote Jean Charest, then the premier of Quebec, Canada, in the foreword to a 2011 “Global Talent Risk” report issued by the World Economic Forum, a prominent research foundation. Over the next two decades, “the world will need millions of new business professionals, engineers, technicians, teachers, plumbers and nurses,” he wrote. “Twenty years from now, we may not have them.” Quite simply, he added, “a global problem calls for a global solution.”

Management analysts agree. “Absent a massive global effort to improve worker skills…there will be far too few workers with the advanced skills and training needed to drive a high-productivity economy and far too few job opportunities for low-skill workers,” McKinsey Global Institute declared in a “World at Work” report last year. The institute, which is the business and economics research arm of global management consulting firm McKinsey & Company, said that “imbalances” between labor supply and demand would affect both advanced and developing nations.

The consequences for the global economy could be grave. The new normal might become continuous jobless recoveries. “Governments need to be involved, educational institutions need to be engaged, and individuals need to keep up with changes, become lifelong learners,” says Melanie Holmes, a vice president of ManpowerGroup, the global staffing firm based in Milwaukee. “We need to partner with educational institutions and be explicit in what we are looking for. We need to work with government to make sure that government money used to train workers is spent wisely.”

In filling job vacancies, Holmes says, employers must recognize they are not hiring “the perfect person.” She says Manpower favors a “teachable fit” approach—hiring people without all the prerequisite job skills and training them to do a specific job. “If I am looking for somebody to fix wind turbines, they better not be afraid of heights,” Holmes says. “I can teach them how to use a wrench, but I can’t teach them not to be afraid of heights. So you want to hire somebody…with aptitude and attitude who you can teach the skills to do the specific job.”

But not everyone buys the skills gap reasoning—at least as it applies to the U.S. labor force. Peter Cappelli, a professor of management and director of the Center for Human Resources at the Wharton School, says there’s a “big surplus of talent.” But employers resist paying market wages, training new employees and working with schools to equip future workers with the skills the employers need. In essence, argues Cappelli, employers too often act like cheapskates. “We wouldn’t say there is a shortage of diamonds when they are incredibly expensive,” says Cappelli, the author of Why Good People Can’t Get Hired: The Skills Gap and What Companies Can Do About It (Wharton Digital Press, 2012). “We can buy all we want at the prevailing prices.”

Brain Drain

After surveying 500 senior executives in various industries worldwide, the most recent corporate risk report from Lloyd’s of London concluded that the talent gap ranked as the second largest risk facing business. Even Germany, an economic power, is feeling the pain in the engineering, medical and IT fields, Lloyd’s says. Across the globe, anxiety reigns. “At the very top of organisations,” Lloyd’s says, “there is huge anxiety about the suitability of available staff for the roles required.”

There’s reason for that anxiety. For one thing, the workforce is graying, and many talented older workers are retiring. In the United States alone, 10,000 baby boomers reach 65 every day, and many retire, taking with them institutional knowledge, valuable skills and loyalty to their employers. With that kind of brain drain, it’s becoming crucial for businesses to retain their old-timers.

To government leaders and corporate CEOs, moreover, the latest 2012 “Talent Shortage Survey” conducted by ManpowerGroup must read like a horror story. The survey, covering 38,000 employers in 41 countries and territories, shows that talent shortages are most acute in the Asia-Pacific region, particularly in Japan, which enjoyed spectacular economic growth after World War II. Of employers surveyed in Japan, 81% said they were having difficulty recruiting the right talent. In India, the number was 48%. Across the region, employers say the most difficult jobs to fill are sales representatives, engineers and technicians.

The picture in the United States is not a lot brighter: 49% of the 1,300 employers surveyed said they are having difficulty finding the right personnel. Brazil, at 71%, topped the list of 10 countries surveyed in the Americas region. The employers reported that engineers and technicians are the most difficult jobs to fill. Finally, in the 23 countries surveyed in Europe, the Middle East and Africa, the most notable skill shortages were reported in Bulgaria (51%), Romania (45%), Germany (42%), Turkey (41%) and Austria (40%). Skilled trade positions were cited as the hardest positions to fill.

Jobless, Unskilled Young People

At a global level, Manpower says, vacancies for skilled trades top the list as the most difficult positions to fill for the fourth time in the last five surveys, a development that is not surprising. “As educational systems around the world have focused on four-year university education,” Manpower says, “this has resulted in the decline of vocational/technical programs—both curricula and enrollments have eroded over the past several decades.”

The erosion of technical and vocational training is problematic. In most management surveys or analysis, the young get special attention—and there’s a reason why: Around the globe, many are unemployed and have no particular place to go. Many are not educated or trained and don’t care to even get involved in the job market. In Japan, for example, an estimated 700,000 young people, known as hikikomori, have withdrawn from society, rarely leaving home.

The latest available numbers suggest 75 million young people, or 12.7%, are now unemployed. According to the labor office of the United Nations, the percentage is likely to rise globally to 12.9% by 2017. In North Africa and the Middle East, youth unemployment rates are projected to remain above 25% in the coming years, the U.N. says.

The economic cost to nations is considerable. Last year, the European Union’s research agency reported that the cost of supporting nearly 14 million “young people not in employment, education or training” was about $200 billion, or 1.2% of European gross domestic product.

It’s a problem, all agree, that must be addressed by education and training. In its “World at Work” report, issued last June, the McKinsey Global Institute clearly defined the issue: By 2030, the global workforce will likely grow to 3.5 billion, up 600 million from the current level. McKinsey analysts said that a dramatic growth in higher-educated and trained workers would be crucial to avoiding long-term, chronic unemployment.

But even with a big uptick in advanced education rates and other measures—retraining mid-career workers, enacting more flexible immigration policies, adding more college-educated women to the workforce, and retaining older workers—advanced economies might still not have sufficient skilled workers to fill the void, McKinsey concluded.

McKinsey painted an even darker picture for developing nations: “If current trends persist, in 2020 there could be one billion workers in the global labor pool who lack secondary education. Hundreds of millions of working adults without job-relevant skills will need training. India alone has 340 million such workers, half of them with virtually no schooling.”

China, a rising economic power in recent years, isn’t immune to education shortfalls. Even though it is expected to become one of the largest suppliers of college-educated workers to the global labor force over the next two decades, McKinsey said, the country may be constrained by slow economic growth and “will likely struggle to keep up” its supply of highly educated workers.

By 2020, the report says, China also “could end up with 23 million fewer workers” than it needs for high-skill jobs. More generally, McKinsey projected that India and the “young developing” economies of South Asia and Africa will become the leading source of new workers in years ahead.

We Need a Revolution

McKinsey’s Anu Madgavkar, the lead researcher on the “World at Work” report, tells Leader’s Edge that business, government, education and political leaders need to work together to solve the growing skills gap. “Nothing short of a revolution,” she says, “is required in this economic environment.”

The situation will be different from market to market. To recruit and compete in the global marketplace, Madgavkar says, companies must understand individual labor markets and anticipate trends in education, aging and wages. In a skills-scarce world, she says, they also must use available skills wisely. “The focus will need to shift to making the most of the skills that workers have,” Madgavkar explains. “In some cases, technology can help reduce the level of education or skill required to perform a job.”

In southern India, for example, 20,000 lesser-skilled people, she says, are “working as rural banking agents…disbursing payments via smart cards, cell phones and kiosks.” She also believes job-specific and vocational training are a big part of the solution.

She’s not alone. Indeed, some companies are moving aggressively to fill the training gap—even if it means creating one job at a time. For example, Caterpillar’s foundation and the International Youth Foundation (IYF) launched a program last year to train 720 young people in South Africa to become electricians, welders, automotive mechanics, bookkeepers and plumbers.

Separately, Caterpillar and IYF joined Walmart, Microsoft, other companies, and the Inter-American Development Bank (IDB) in a “New Employment Opportunities” partnership designed to provide job training and placement services for poor and low-income youth in Latin America and the Caribbean.

According to the IDB, 32 million young people in the region, one in every five, do not work or attend school. At the same time, the IDB says, a management survey revealed that half the companies across the region were struggling to find qualified employees.

Wayne Cascio, a professor at the University of Colorado Denver Business School and a recognized expert on human resource management, agrees that training and education programs will produce big dividends. In January, Cascio, returned from a trip to Hong Kong and Singapore, singing the praises of Asian governments that are investing heavily in their most important capital—people.

“There is no question that Asian governments clearly see HR as a major source of competitive advantage,” Cascio says. “They are spending, big-time, particularly in Singapore, on education and training. They want to attract global capital, and global capital is drawn to places where you have strongly educated classes. Singapore is booming.”

Cascio says that “virtual global mobility” is proving valuable to companies and organizations that are short on talent. In a PowerPoint presentation he uses in speeches, Cascio says that the virtual workforce will grow to some 500 million people over the next 20 years, or double the number today. These arrangements, he explains, save money and enable employers to retain skilled workers, although some managers worry that the lack of personal contact might blunt a company’s innovation.

From the insurance industry’s viewpoint, the idea of aggressive training programs also is hitting home in the global insurance marketplace, according to Lloyd’s. In its latest corporate risk report, Lloyd’s says: “Parts of the insurance industry, including Lloyd’s, have started programmes to recruit raw talent and train them to ensure an expert and innovative workforce.”

Insurance industry leaders certainly see a talent gap, and they have embarked on a campaign to recruit and retain the next generation. “That is the number one problem,” says Peter Miller, the president and CEO of the American Institute for CPCU and the Insurance Institute of America. Miller says the industry is aggressively lobbying college students and other millennials who have little appetite for entering the insurance business.

“The insurance industry has not promoted itself as a good career option for a very long time,” Miller says. “What is different now? We are seeking to say this is a great industry we ought to be proud of, a realization that this industry does a lot of good things on a daily basis for a lot of people.”

Julia Kramer, The Council’s senior vice president of Leadership & Management Resources, encourages recruiters to highlight for job candidates both the variety of exciting positions available in the brokerage industry and the flexibility to pick virtually any other industry to focus on.

“If you are interested in the entertainment industry, you can insure sports teams or rock bands,” Kramer says. “If you love boats, you could specialize in marine insurance. Know about construction? Buildings don’t get built and communities don’t grow without construction insurance. The possibilities are endless.

“Insurance is a great career that many young, talented people don’t know much about. We need to let them know that you can make a very good living as a broker. So not only is it an interesting career, but a well paying one.”

No Silver Bullet

When all is said and done, no one has a magic wand that will turn things around overnight. The road to a booming global talent market will be long and difficult to navigate. But experts say any obstacles must be overcome. In the words of one senior management consultant, “Solving this issue is huge.”

The McKinsey Global Institute perhaps best summarizes the issue and the challenges ahead: “As the 21st century unfolds, the supply of high-skill workers is not keeping up with growing demand, while too many workers are left with inadequate or outdated skills. Slower growth, rising income polarization, growing pools of unemployed or underemployed workers, and soaring social costs are real possibilities. To keep those possibilities from becoming realities, policy makers, business leaders, and workers themselves must find ways to bring education, training, and job creation into the 21st century.”