Thinking differently about talent in a tighter labor market

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The hiring process, with limited information on candidates and imperfect interview approaches, has always been challenging for employers. In the currently tight U.S. labor market, the challenge has gotten even harder. More workers are leaving their jobs, and according to McKinsey’s recent Great Attrition research, one-third of them are leaving without another job in hand. This level of turnover reflects a significant shift in the talent market. Workers are demanding more from employers and voting with their feet when they don’t get it.

When McKinsey asked workers why they were leaving and what they are looking for in their next job, purpose, good colleagues, and flexibility were the most common responses. Compensation, with average wages rising across occupations, was viewed as table stakes. The switching costs for workers to change companies, particularly in more senior roles, have also decreased. With remote or hybrid work becoming much more acceptable, many workers now have a wider set of job options, particularly in higher-paying occupations with hard-to-find talent.

In such a tight hiring market, companies need more emphasis on retaining and developing their own employees. A new approach can start with reconsidering human capital from the individual worker’s perspective. The McKinsey Global Institute (MGI) looked at millions of real-world work histories and job postings across four major economies (US, UK, Germany, and India) to examine how people accumulate skills. The research found that globally, skills built on the job account for roughly half of the average person’s lifetime earnings. That share is much higher for workers without college degrees—the lower your starting salary, the more of your lifetime earnings are due to experience. This share is what we call “experience capital,” and the people who strategically broaden their experience and skills can increase their experience capital and earn more over their lifetime. The remaining portion of lifetime earnings is due to the education and inherent capabilities that each person initially brings to the labor market—for example, the years of education required to become a doctor or a lawyer.

The research showed that individuals can build greater experience capital and boost their lifetime earnings by moving jobs, especially when each new position stretches their skills more dramatically. Making strategic career moves and learning along the way is the best, and often the only, strategy for people who start in low-wage jobs to achieve higher earnings over the course of their working life.

Movement is part and parcel of the labor market, and there’s no fighting the tide. MGI’s data show that the average worker changes jobs every two to four years, and that was before the Great Resignation. A huge talent pool is always out there searching, and companies need to build a reputation to attract the best and brightest. Surveys indicate that workers are particularly seeking jobs with greater learning and growth. In a June 2021 Gallup survey of 15,000 US workers, 61 percent said that the opportunity to add new skills is an extremely or very important factor in deciding whether to stay at their current job.

Companies that make significant investments in training can build workforce skills more systematically—and employees who are learning are more likely to be engaged and want to stay. Building experience capital is good for employees and good for companies.

In addition to offering training, employers can retain and develop their talent by making job movement within their organizations more fluid. It may feel more comfortable or logical to let someone who is doing a good job in their role continue doing the same thing year after year rather than giving them a new role and runway to grow. But creating career paths is an important lever for retention—and filling vacancies with people who may need to add a few new capabilities but already know the business and the culture is generally less risky than bringing in an external hire. Even lateral moves can enable people to recharge, expand their skills, or find a position that is a better fit.

Filling roles with people who have learning curves, whether they are internal or external, requires companies to deliver effective on-the-job coaching and apprenticeship. Learning can take the form of structured in-person courses tailored to specific employee cohorts or digital content modules that employees can access on their own. However, nothing can substitute for learning by doing and coaching delivered in the moment. Every organization needs frontline and middle managers with the ability to teach as well as workers with the ability to learn.

Despite the challenges of hiring right now, mobility is ultimately a good thing, acting as a type of healthy circulatory system for organizations and economies. It has increased the stakes for companies to retain and develop their own talent. The current pressures in the labor market will hopefully result in workers who are attuned to the importance of lifelong learning and employers who are better at delivering it—and that will be an economy that works much better for everyone.

This article originally appeared in Forbes.

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