Study: Labor Is Not in For Shortfall

While employers may be in for a bumpy ride down the road to recruiting and hiring, those challenges are more a product ofthe nature of the employer-employee relationship. This rocky road has more to contribute to the difficulty of retaining employees, not from a perceived shortfall in the number of workers caused by demographic shifts, according to the Will There Really Be a Labor Shortage? study conducted by Peter Cappelli, professor of management and director of Wharton’s Center for Human Resources.

Cappelli says the idea that there is an impending labor shortage does have some basis in truth, centered on the relatively small size of the “Baby Bust” generation – those that followed Baby Boomers into the labor market. This later generation – who are currently between the ages of 23 and 37 – is about 16% smaller than the massive Boomer generation, who were born between 1946 and 1962.

However, the study says a smaller generation does not necessarily translate into a smaller workforce. As evidence, he points to college enrollments over the past few years, that following the logic of a smaller generation equals a smaller workforce, would then be ultimately smaller. In all actuality, colleges did not cut back on the size of their graduating classes when the Baby Busters came through school. In fact, the overall number of college graduates since the Buster generation graduated high school has actually gone up because more students who might not have gone to college are being pulled into the system of higher education, and it is college graduates who are most in demand by employers.

Additionally, the study says it is more likely that Boomers will work through the age of 65 rather than retire like earlier generations. Thus, the Baby Bust generation will not only be joined in the workplace by their predecessors but also an even larger generation of people, who are now in their teens and 20s.

Slowed Growth

The other argument made by the labor shortage camp is that the rate of growth of the economy as a whole is in for a slow down due to a link to the growth rate of the labor force – that is, slower growth in the labor force means slower economic growth. Yet, the study dismisses these concerns by saying the US economy has always grown faster than its workforce. As evidence of this, Cappelli points to a continued increase in the standard of living in America.

Instead of the size of the workforce then, the study finds that the economy’s growth in more of a product of productivity growth. For example, the study points to the US economy of today that is eight times larger than it was at the end of the Second World War, however the workforce is only twice as big. Thus, employees are roughly four times as productive today as they were in the late 1940s.

“The upshot of my study is that the labor force is not shrinking,” said Cappelli in a statement. “The Baby Bust cohort is being followed by an even bigger cohort now in their 20s, and Baby Boom workers simply will not be retiring from work in the numbers that many people expect. People keep talking about the ‘coming labor shortfall.’ Well, they were talking about the ‘coming shortfall’ 10 years ago, and they’re still talking about it today, but we haven’t seen it. Demographics don’t drive labor markets. Demographic changes are gradual and predictable, and the economy and the labor force have enough time to adjust to them.”

Despite the study's findings that there is not currently a labor shortage, many employers point to the job market from 1998 to 2001 when workers were hard to come by and thus - as simple supply and demand will dictate - wages went through the roof.

One reason for this market reaction, the study finds, was not necessarily a lack of workers, but the pressure companies placed on themselves to hire laterally from the outside to bring in new skills, which was accelerated during the late 1990s. Evidence was found in the breadth of jobs during the period, and carried through to today's job market that are filled from the outside, rather than hiring entry-level workers and allowing them to work up through the corporate food chain. This increase in outside hiring contributes to higher turnover, which forces employers to be in a state of continuous hiring and gives rise to the feeling that there is a shortage of workers.

"Even though there may have been no overall shortage of workers [from 1998 to 2001], the fact that many of those workers were moving from one employer to another generated widespread vacancies that could not be met by the level of hiring most firms were capable of sustaining," the study says. "Employers could be forgiven for thinking that this situation looked like a labor shortage: Despite flat-out hiring, they could not bring in enough workers to meet their needs. Retention management should have been part of the solution along with performance management to identify who were the truly important people to retain."

Thus, Cappelli say that rather than fearing a non-existent workers' shortage, companies should invest in a range of responses to meet their labor needs. The goal should be to make better matches between applicants and jobs, which means uncovering the right applicants who truly fit the jobs they apply for.

"The wrong implication to take away from the study would be to say there's no reason to worry about anything concerning employment because there's not going to be a labor shortage. A tight labor market can come back in matter of months if the economy picks up steam. The real issue then will be to have a system of practices in place of finding good people, hiring them when you need them and keeping the good ones," says Cappelli.