When labor markets fail, the financial and social consequences are enormous, whether in developed or developing countries. We estimate that the annual social cost of labor-market issues, in direct and foregone GDP, is approximately €1.8 billion in Europe, the Middle East, and Africa alone. Unemployment was one of the major drivers of the Arab Spring; in several European countries, mass protests by unemployed youth have put pressure on governments to react. Additionally, there are costs that cannot be quantified, such as social unrest, decreased personal well-being, and rising health-care expenditures.
Combating labor-market failure is therefore a top priority for governments—but it is no easy task. Job-creation strategies, such as economic-stimulus programs and changes in labor regulations, often result in political wrangling and gridlock. There is, however, a less contentious path toward increasing employment: improving the effectiveness of labor-market instruments and institutions—and of the substantial resources that governments spend on them.
Drawing on McKinsey’s experience working with labor institutions in 26 countries, the McKinsey Center for Government (MCG) has developed tools for diagnosing where the greatest leverage exists for addressing labor-market challenges. Employment issues can be split into three types:
- Demand issues, such as unemployment and under-employment among women, youth, and elderly
- Supply issues, such as skilled-labor shortages and lack of vocational training
- Market-clearance factors, such as information gaps, governance of labor agencies, and evaluation of the effectiveness of market interventions
MCG has collected practical, in-depth perspectives on these issues. By tapping into our extensive global network and research, in particular from the McKinsey Global Institute, we have assembled a rich database containing quantitative information on 39 indicators—including economic growth, job creation, labor-market rigidity, and participation rates of different demographic groups—from more than 45 national labor markets. These data, along with our library of more than 100 case studies of labor-market initiatives (many of which were informed by McKinsey’s on-the-ground experience) provide detailed views into how various nations have tackled labor and employment issues.
This fact base has helped national governments and labor-market institutions design tailored solutions. For example, a North African nation built an education and certification program with the potential to create 50,000 jobs. A Middle Eastern country established a labor agency for unemployed youth. A European labor agency improved the efficiency of its employment offices, halving the length of time its constituents were unemployed while dramatically reducing its overall costs.
Research and collaboration
We are continually broadening and deepening our understanding of labor markets by collaborating with public-sector bodies and leading experts around the world. We invite labor ministries and agencies to explore how our insights into demand, supply, and market clearance might apply in their own labor markets. We also invite government leaders to engage with us in discussions about labor-market initiatives they have undertaken. Perspectives from different geographies and contexts contain valuable lessons for governments across the globe, allowing them to learn from others’ missteps and successes.
For further information or to discuss potential collaboration and participation in our ongoing research, please contact us.