2007 Volume 10 Issue 1

What You Need to Know about Labor Shortages

What You Need to Know about Labor Shortages

How will the predicted U.S. labor shortage impact your business?

Labor shortages mean increased costs. Before business practitioners react to minimize the anticipated costs, three simple questions need to be answered:

Will there really be a shortage?
Where to look for available workers in the future? and
How to select workers from different available pools?

This article provides insights and key information that can be used by practitioners to answer these three questions before responding to the labor shortage and later possibly regretting that response.

Photo: James Thew

The Labor Shortage Dilemma

In today’s world, labor shortages can mean different things to different people. Some researchers focus on skilled labor shortages while others focus on shortages among non-skilled worker groups. It is even possible to make the case that there are no longer local skilled worker shortages on a global level.

A national labor shortage across all occupations in the U.S. has been predicted. According to the Bureau of Labor Statistics, the number of available jobs in the United States is projected to increase by 15.2 percent to 22 million jobs by 2010. At the same time, the United States civilian labor force is projected to increase by only 17 million people by 2010 resulting in a five million worker shortage to keep up with the job growth over the next 10 years.[1] So demographics in the U.S. play an important role in declining labor supply side of shortages on an aggregate level. But with declining demand shortages, it will ultimately depend on which falls faster, which today is unknown.

In this article a focus is placed on both numbers and cost. Specifically, shortages are said to exist when cost-effective workers in a local or national market are not enough to meet demand. The standard for cost-effectiveness is the price of available and qualified workers for both on-shore and off-shore.

Reasonable business practitioners should be inclined to look for ways to minimize the added costs of local labor costs and projected labor shortages. But what if the predicted labor shortage did not materialize? The resources spent in response to the labor shortage would be lost.

A similar dilemma existed in the year 2000 when businesses were asked to prepare for Y2K. Businesses in the U.S. spent billions; some say trillions, while businesses in other countries spent nothing.[2] But overall Y2K disruptions were far less than predicted. Managers who spent scarce resources on Y2K lost time, momentum, and the use of the resources spent on Y2K for other capital projects.

This article suggests that three simple questions need to be answered before committing resources to combat labor market shortages. Individual business practitioners are encouraged to review the questions and the information provided as part of their due diligence. Illustrations and observations are provided to initiate the assessment process. But the variety and range of possible responses to the questions are so large that no cookie cutter solutions can be provided.

Will There Be a Labor Shortage?

The answer to this question depends on how narrowly you define the labor market. If labor markets are local or even national, shortages are much more likely than if they are global. Potential labor shortages across the U.S. economy in the period from 2010 to 2030 are estimated based upon the aging demographics of the U.S. work force, declining U.S. labor force participation rates, and the need for increased productivity. The pattern of U.S. labor force participation rates peaked in the mid 1990s and is projected to steadily decline through 2014.[3]

Predicted labor shortages in the U.S. are based on increasing demands for products and services and declining available pools of U.S. workers. In the past managers looked for available workers in local or national labor markets but today business practitioners are looking at global labor markets.[4]

A recent study found that job losses, due to off-shoring, in the United States from 1999 to 2001 were estimated to be 195,000 jobs per year.[5] Off-shoring is the practice of relocating business processes, such as production, manufacturing, or services, from one country to another. It differs from outsourcing which includes subcontracting in the same country or moving internal business practices to an external company. Today’s structural losses in a local market become cyclical gains in the global market. For example, in the late 1990s technical software developer costs rose in California. As a result, Intel outsourced its IT development work to a company in India. Years later Intel purchased the outsourcing company, integrated it as a new Intel division, which in turn created off-shore jobs. The number of jobs increased but the geographic mix of jobs changed. In essence, jobs were not lost, they were relocated.

Given the availability of off-shore workers, U.S. business practitioners must now determine which jobs must be filled by U.S. workers and which can be filled by off-shore workers. Large corporations are leading the way in decreasing the numbers of U.S. workers relative to off-shore workers. For example, Intel moved its Information Technology Development Group to India in two stages. First, Intel outsourced the services to several outsourcing companies in India. Then they chose the best provider, purchased the company, and integrated its employees into their corporate structure. Today’s ERP and web-based technologies enable Intel to manage and run a more cost effective service department outside the U.S. compared to that inside the U.S.

When specific jobs or occupations are examined the choices between off-shoring and managing U.S. labor shortages can be even more important. While a global labor market is still developing, selected job markets are already sending strong signs regarding future demands for off-shore workers by mid-size and even smaller businesses. Large companies are leading the way. Specific examples include customer service, application software programming, website services, and most recently financial service jobs. In India, Cisco, IBM, and Microsoft have already opened facilities with thousands of employees working the phone booths both as “outbound” and “inbound” operators. They sell everything from credit cards to phone minutes and answer calls for everything from tracing lost luggage for U.S. airline passengers to solving computer problems.[6] Again, outsourcing is a practical first-step to off-shoring.

Industries and companies are in different stages of off-shoring jobs and outsourcing functional work activities. However companies who maintain a view that available labor is a local or national labor market issue face serious comparative disadvantages and are more likely to face shortages than companies that view labor as a global market.

Where to Look for Available Workers in the Future

In the future available workers for U.S. businesses will be increasingly found in the global market. Local and national available workers will remain important for jobs that must be done locally and for jobs that are directly related to the core competencies of the business. For example, nursing services need to be provided locally so off-shoring is not an option. When core competencies involve intellectual property going outside the U.S., protection costs can dramatically increase. For jobs that can be moved off-shore or outsourced, the two factors to track are where job qualified candidate pools are increasing and how long hiring cycles are in the U.S.

Higher job qualifications are generally associated with higher education requirements. Following where students with advanced degrees, including MBAs, are located is a good indication that skilled available workers will be found in the global rather than the U.S. market. The following patterns illustrate the changing importance of the global market:

  • In the period from 1975 to 2010 the U.S. share of Science and Engineering graduates with doctoral degrees is projected to fall from 40 percent to 15 percent.
  • In 2005 the University of California school system had an international student body of 5.14 percent.

Hiring cycles for new workers in the U.S. are becoming longer. While web sites, such as Monster.com and company job pages, provide quicker access to potential candidates, selection processes can be much longer. Smaller businesses in less populated areas were the first to notice the crunch. At Spectrum Design it now takes one year to hire a civil engineer. Less than five years ago it took two months. In the U.S. selection costs for qualified available workers are also increasing because companies cannot trust what applicants put on their resumes. A study conducted by a resume-writing service found that 43 percent of more than 1,100 resumes examined had one or more “significant inaccuracies,” with respect to degrees and job experiences. While this evidence may be subjective, it is clear that inefficiencies in the hiring process make it difficult for employers to find capable and experienced employees.[7]

Overall the trends in graduate education and the higher selection costs to find U.S. workers reinforce the need for business practitioners to consider looking off-shore in the global labor market. But the range of education requirements and the severity of search costs are so large that no general conclusions can be drawn. Collecting information and assessing where the available labor pools are for targeted jobs are reasonable interim steps in the decision making process.

Photo: James Thew

Selecting from Available Worker Pools

While there is substantial reason to believe that the size of the U.S. labor force will decline in the future, there is also real ambiguity about the emergence and relevance of future labor market shortages to businesses. What is certain is that if qualified and cheaper available pools in other countries emerge businesses will have to make informed tradeoffs. The following is a list of practical actions for U.S. businesses:

  • Separate local, national, and off-shore labor market options for review.
  • Identify two occupations that are important to business growth. Find out where the numbers of qualified workers are growing and if the U.S. available worker pool is expanding or contracting relative to other geographic areas. Expand the occupational analysis over time to other key growth occupations.
  • Consider how technology might be used to develop partnerships with their available workers. This could be done in three ways:
  1. Putting top priority on automation for jobs in which few applicants are available.
  2. Building a “partnership between person and machine” for the jobs with applicants with insufficient skill levels.
  3. Using technology to extend productivity among the limited number of skilled workers to automate the routine work so that they are available for their concentrated tasks.[8]
  • Track the length of hiring cycles for U.S. workers and if it increases dramatically consider other available worker pool options.
  • Consider immigrant workers. The hiring costs for H1-B and green card workers may be less than the hiring costs for U.S. workers.
  • Connect with educated and entrepreneurial MBAs and doctoral talent as they move back to their countries since the availability of off-shore talent pools are likely to develop around them.
  • Piggy back off-shore labor options with international business development initiatives. Business life cycle models paint a slow and steady picture for expansion into international markets. When such opportunities arise it also opens the door to more thorough investigations of off-shoring labor markets.
  • Outsource a non-core competency function as a prelude to future off-shoring.
  • If possible, only consider local and national available pools until Enterprise Resource Planning (ERP) and web technologies are in place to support other business practices.
  • Use initiatives intended to discover new ways to share information and share services as opportunities to consider global labor markets. For example, UPS used its web communication platform and ERP systems to build new business opportunities based on its efficient supply chains. When a Toshiba computer is sent in for repair, UPS workers (who are trained and certified by Toshiba) receive the computer, fix it, and resend it out. This makes the shipping and the repair a one stop shop where work can be locally available.[9]

Today, competitive advantage is a powerful force that extends into the selection and use of local, national, and global workers. Nestlé in the U.S. recently outsourced their accounts payable “function” to HP Global Services. HP actually runs Nestlé’s accounts payable (AP) system which is part of their GLOBE SAP enterprise wide platform. AP invoices are received and scanned in the U.S. and sent to off-shore HP workers in Costa Rica. Customer Service is provided by off-shore HP workers in India. Solutions that work for larger businesses have a strange way of becoming scalable and work their way through the economic system. Doing due diligence by assessing multiple labor market options is no longer just for the Fortune 500 companies.

[1] Thad Peterson, “More Jobs, Not Enough Workers,” (2006). http://featuredreports.monster.com/laborshortage/forecast/.

[2] Erich Luening, Mikey Ricciuti, and Mike Yamamoto, “Everyone Pays a Price for Y2K Hype,” (1999). http://news.com.com/2009-1091-232056.html.

[3] U.S. Labor Force Participation Rate Statistics. www.bls.gov.

[4] Richard B. Freeman, “Labor Market Imbalances: Shortages, or Surpluses or Fish Stories?” Boston Federal Reserve Economic Conference “Global Imbalances—As Giants Evolve,” Massachusetts, (June 2006).

[5] Charles L. Schultze, “Off-shoring, Import Competition, and Jobless Recovery,” Brookings Institution, (June 2004).

[6] Thomas Friedman, The World Is Flat. (New York: Farrar, Straus, and Giroux, 2005).

[7] Ibid.

[8] “Shortages of Skilled Labor May Change Ways Companies Use Technology.” http://gtalumni.org/StayInformed/techtopics/spr91/technology.html.

[9] Ralph Kozlow, (January 6, 2006). http://bea.gov/bea/papers/06AEAMNCpaperFinal.pdf. (no longer accessible).

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Authors of the article
Donald M. Atwater, PhD
Donald M. Atwater, PhD, is a practitioner faculty of economics at the Graziadio School of Business and Management. Previously, he served as chief executive for a southern California technology company, the chief financial officer of an international, value-added software company, a principal in the human resources and compensation practice at William M. Mercer, and a director and co-founder of several start-up companies. He has created decision-support technologies and implemented them in a number of Fortune 100 companies, including AT&T, Intel, Dell Computer, Apple Computer, and Nestle USA. Dr. Atwater has also worked with many public organizations, including the U.S. Navy, the General Accounting Office, the state of California, and both the county and city of Los Angeles. His work has been published in the Monthly Labor Review and he has co-authored numerous papers. Today he owns and operates a company dedicated to building goal-driven communities.
Heather Klass
Heather Klass, is a full-time student at Pepperdine University’s Graziadio School of Business and Management. She earned a Bachelor of Arts degree from UCLA in Economics with a minor in Spanish. Klass has several years experience in the healthcare information technology sector focusing in the areas of operations, finance, and human resources.
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