McKinsey Global Institute

Article| Foreign Policy Magazine

Help wanted

March 16, 2012 | byByron Auguste, Susan Lund and James Manyika

Five things that are making it more difficult to get advanced economies back to work

Today, 40 million workers across advanced economies are unemployed. Yet businesses can't fill job openings because they can't find qualified workers. This labor market dysfunction is a manifestation of the rapid evolution of the nature of work and the inability of worker skills — and labor market institutions — to keep up with the pace of creative destruction in business. As a result of these changes, many jobs that were lost during the recession may be gone for good — bad news for the workers who held them and perhaps for the economies in which they live, too. To meet the long-range challenge, wealthy nations will need to find new approaches that go beyond simply stimulating growth.

Here are five trends from the McKinsey Global Institute's latest discussion paper, Help wanted: The Future of Work in Advanced Economies that explore the forces shaping which jobs are created, who fills them, where they are located, and what they pay.

1. Technology is changing the nature of work

Over the past three decades, technology has altered how production and routine transaction work is done — substituting machines for assembly-line workers and ATMs for bank tellers, for example. The next frontier is "interaction work," the fastest-growing employment category, which s includes low-skill jobs that must be done face face-to to-face (such as day-care work), as well as the managers and professionals who are the costliest corporate resources. One shift underway is for companies to disaggregate these jobs into multiple tasks-and reassigning the routine tasks to lower-skill employees, the way a paralegal takes on the routine work of attorneys. This model applies to other professions and to corporate roles, such as human-resources managers, which in many companies has been broken down into subspecialties (benefits administration, compensation, etc.). Jobs today are also becoming more "virtual" — with broadband connections, cloud computing, and other technology, many interaction jobs can be conducted "anytime, anywhere," making it possible for employers to engage talent (full-time employees or contract workers) on an as-needed basis.

2. The growing skills mismatch

The divergence between the prospects of highly educated workers with advanced skills and those with less education is growing. In the United States, the unemployment rate for college graduates has never topped 5 percent since 2008, while the unemployment rate for high school drop-outs rose to more than 15 percent at its peak in 2009 and 2010. Across OECD countries, the trend is clear: jobs that are being created are increasingly for workers with more education and skills. As a result, many workers are being left behind. By 2020, MGI projects that the United States may be short 1.5 million workers with college or graduate degrees — and face a surfeit of nearly 6 million workers who have not completed high school. Similarly, France's employers could be looking for 2.2 million more baccalaureate holders than will be available, while that nation will have an oversupply of 2.3 million workers who do not have their "bacs." If this skill mismatch persists, advanced economies will face a growing pool of permanently unemployed.

3. Geography matters

Exacerbating the skilled vs. unskilled problem are geographic mismatches: workers with desired skills are often in short supply where companies are hiring, while places with the highest unemployment may have little job creation. This geographic imbalance is occurring both across national borders and within them. In the United States, while unemployment stands at more than 12 percent in Nevada (which was badly hurt by a massive real estate bubble), only three states away, Nebraska has only 4 percent of the workforce out of a job. And surprisingly, compared with their parents and grandparents, today's working-age Americans are less likely to relocate to find work. Other advanced economies, such as Britain, France, and even Germany, have similarly stark differences in regional levels of growth and employment. Unemployment in southern Europe is almost twice as high as in northern Europe. Within Britain, for example, the unemployment rate is 6 percent in the southeast and 12 percent in the northeast. Policymakers must find new ways to encourage mobility, for instance through tax incentives, such as generous tax deductions for moving expenses incurred in connection with employment. Some companies are creating virtual jobs that allow them to hire people wherever they are located — gaining access to a broader base of talent and saving on real estate costs in the process.

4. Growing pools of untapped talent

Because of changes in the nature of work and demographics, many advanced economies have growing pools of untapped talent, especially among the young, women, and people approaching retirement age. The growing number of unemployed youth poses a serious long-range challenge. Across the OECD, youth unemployment has risen to nearly 18 percent — and in some countries it is twice that average. Young people who cannot find work suffer life-long handicaps; their earnings never catch up and they are far more likely to rely on government assistance down the road. Unemployment among Spanish youth has continued to rise since the debt crisis and now stands at close to 50 percent, which could lead to many years of joblessness — and diminished career opportunities — for millions of young Spaniards as well as additional costs for a government that is trying to reduce its fiscal deficits. Creating pathways to employment for these young people must be a priority. Raising the labor force participation of women and older workers also presents an opportunity and can help fill the skill gap. Workers older than 55 will be an increasingly important resource in advanced economies. In Europe, where the population is aging rapidly, the potential loss of talent is significant. Advanced economies that can raise the employment rate for older workers — rather than seeing them pensioned off — will have an easier time filling the high-skill jobs that will drive growth and productivity. In many countries, women represent an under-utilized labor pool, too. For instance, if Germany raised the labor participation rate of women (currently 53 percent) to Sweden's level (61 percent) it could cut its anticipated shortage of skilled workers by one-third.

5. Disparity in income growth

Trends in job creation are contributing to growing income polarization across advanced economies. Households at the bottom of the distribution have seen little or no income growth in many countries over the last decade, raising questions about aggregate demand, living standards, and social stability. As we have seen, globalization and technology have greatly increased demand for highly skilled workers, pushing up wages for these people and reducing demand for the less-skilled. Other factors are driving growing income disparity as well. One is shifting patterns in family formation: across the OECD, the proportion of single-headed households (single adults with and without children) has risen by 25 percent since the 1980s, limiting the growth of household income. At the same time, marriage rates rise along with educational attainment — and with high earners more frequently marrying one another, it further widens the income gap. As a result, most advanced economies have seen incomes grow faster for the highest earners than for the lowest.

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As a result of these trends, advanced economies face a long-term jobs problem that they will not be able to address adequately with standard solutions. Both policy makers and business leaders will need to find new approaches. Of course, governments will need to continue to encourage overall economic growth — using fiscal and monetary policy, and removing barriers to business expansion. But restoring aggregate demand alone may not be enough to put all of today's unemployed back to work.

To do so, governments will need to adopt policies and strategies aimed directly at preparing the workforce — making sure there are bodies and skills ready for the jobs of tomorrow. It's of fundamental importance for national competitiveness. Continuing to improve primary and secondary education and overhauling post-secondary and vocational education for young people who are not headed to college and for mid-career workers who need retraining must be a priority. Relatively simple steps like creating a national jobs database — to enable students and workers to see what jobs are in demand and what credentials are needed — would help. In addition, policy makers can unlock growth and job creation by promoting entrepreneurship and innovation, catalyzing investment in infrastructure, and streamlining regulatory approval processes.

Business also has a critical interest in finding solutions to the jobs challenge. In a global economy, companies will continue to seek talent wherever they can find it and at the most attractive cost. But this formula is becoming more complex and simply finding the best-priced labor is no longer always the optimum solution. Companies have rising concerns about supply chain risk — from natural disasters and other causes — and are seeing wages rise in coastal China and in India's offshoring capitals.

One strategy is for companies to make talent development a competitive advantage; when the critical resource is talent, companies that can find a steady supply of highly qualified workers and teach them distinctive skills should outperform rivals who can't. This will require stepping up investments in workforce training to levels we have not seen previously. Infosys, the Indian IT services giant, has become one of the top training institutions in the world, capable of putting 14,000 new employees at a time through its 23-week program. This capability has given Infosys a competitive advantage and has helped enable its rapid growth. Companies can also tap into new pools of skilled talent by using technology to bridge the geographic divide — offering flexible, remote work arrangements to workers they could not hire otherwise. In the coming years, companies that can build up their own supplies of the best trained and motivated workers will win — and so will the economies in which they operate.

This article originally ran in Foreign Policy Magazine.