HR Insights
August 22, 2023

Labor shortages: Why they’re happening and what leaders can do about them

Author and futurist Alexandra Levit explores what’s behind today’s labor shortages and what organizations can do to resolve and prevent them.

Table of Contents

Workforce futurists have been predicting mid-twentieth century labor shortages for some time now, but many forecasts seemed unduly alarming – until the pandemic. Now, a confluence of factors is rapidly decreasing the global worker supply.

Employers have noticed. According to Ceridian’s 2023 Executive Survey, 66% of the global leaders surveyed have experienced a labor shortage in the past 12 months. And 88% said it’s at least slightly likely shortages will continue over the next year.

The surveyed leaders aren’t wrong about the likely continuation of labor shortages. As they grapple with a workforce complexity crisis fueled by a drastic increase in the types of work and workers, an ongoing skills and roles mismatch, and more complex compliance, organizations will continue to struggle with these shortages.

Many executives I’ve spoken to recently wonder about the origins of the current wave of labor shortages and how they can protect their organizations from critical deficits in the near- and long-term.

So, let's start with some of the primary causes.

Fewer people in the workforce

The main culprit, as futurists have noted for decades, is demographic shifts. Specifically, falling fertility and labor force participation rates mean there are simply fewer workers available to be hired.

Over the next decade, with most baby boomers entering retirement, the number of working-age people aged 15-65 is projected to decline by over three percent in some countries, including the United States. And even the people in this age range aren’t necessarily working to their full potential. Per a recent World Bank analysis, the global labor force participation rate has fallen steadily since 1990 from more than 65% of working-age people to less than 60% today.

These figures are already affecting unemployment. In April 2023, the U.S. Bureau of Labor Statistics’ Jobs Report showed that unemployment for 20-to-24-year-olds fell to 5.4%, the lowest it has been since 1969. As a result, newly minted college graduates are entering a job market that’s not only more robust than a year ago, but significantly stronger than it was before the pandemic.

Low-wage workers lack mobility

Labor shortages among low-wage workers are getting the most attention recently. And with good reason, as they are currently among the most dire shortages. One major factor is stricter immigration policies, and the other, economists speculate, is a “dual labor market” that doesn’t allow much room for mobility.

A new research paper published by economists at the Federal Reserve Board in Washington, D.C. shows this dual labor market is a problem for countries like the U.S. The researchers’ analysis documented a primary workforce comprising 55% of the population. These workers have high levels of employment stability and are only unemployed for short periods of time.

The secondary labor market, on the other hand, makes up 14% of the population and lives in a constant state of flux with poor wages and working conditions. These workers experience six times higher job turnover than those in the primary tier and are 10 times more likely to be unemployed. At present, extremely limited mobility between the two sectors negatively impacts the United States’ (and others’) ability to attract lower-wage workers who want to climb their way up.

Hiring needs have increased post-pandemic

Sky-high inflation and a post-pandemic hiring boom are affecting labor supply as well. Mallory Vachon, a senior economist at LaborIQ, told Roy Maurer in a Society for Human Resource Management article that substantial hiring is forecast across almost all sectors. She predicts more than 100 million job openings this year. This is a drop from 2022, which reached its highest level in 21 years, but still much higher than the pre-pandemic average.

It's clear that if the numbers keep moving in this direction, no amount of fervent wishing will bring back the plentiful labor supply of the past. Instead, if organizations want to ensure they have the workers to accomplish their goals, they must address the problem head on. Fortunately, there are several strategies they can prioritize.

Launch skills training initiatives

Ceridian’s Executive Survey found that 93% of leaders believe their organizations lack at least one skill type, with shortages highest in the areas of specialized technical skills, industry-specific skills, and creative skills.  With internal mobility rising in acceptance and implementation – 74% of Ceridian’s respondents said it has increased post-pandemic – upskilling and reskilling your existing employee population is a powerful way to combat current and future labor supply issues and retain loyal employees longer.

Loosen hiring requirements

If ever there was a time to get rid of outdated practices like insisting on a four-year college degree for entry-level professional positions, this is it. Although 79% of Executive Survey respondents said their organizations are currently often or very often using skills-based hiring, old habits die hard. Commit to expanding hiring efforts to include populations such as military veterans and the formerly incarcerated (known as fair-chance hiring).

Provide remote work opportunities

Organizations that insist on fully onsite work will close themselves off to worker segments for whom flexible work is essential, such as caregivers, the disabled, and seniors. Onsite mandates also limit hiring to specific geographies, which is increasingly impractical.

Meet changing employee expectations

Keep in mind that wages have been eroded by inflation and in general have not kept pace with the cost of living. Today’s candidates are seeking higher pay along with expanded benefits including financial wellness offerings and mental health support. Organizations are only as competitive as their willingness and ability to listen to what workers need and deliver accordingly.

Develop a culture of agility

While it wasn’t long ago that employers could take an endless supply of workers for granted, this is no longer the case. Even if you think you have your labor supply issues in hand today, you should be prepared for the situation to change quickly. Putting nimble external hiring and internal mobility strategies in place now will help your organization be successful despite economic factors outside its control.

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