Leadership Spotlight

A Coming Labor Shortage?

Peter Cappelli has made a career of charting the often-turbulent course of employment in America, from studies on downsizing to a book on managing in a market-driven workforce. Cappelli maintains that pronouncements from the U.S. Census Bureau, The Conference Board and others of an inevitable dearth of labor are overstated. "Many of the studies that foresee labor shortages in the future assume that retirement patterns will be unchanged, and that people will retire at the same age even as life expectancy and the ability to work longer go up," Cappelli writes in his article, "Will There Really be a Labor Shortage?," published in a recent issue of Public Policy & Aging Report. "Surely this is unrealistic if for no other reason than financial resources for retirement may not allow it. There are many indications that the baby boom generation expects to keep working longer, and even a small increase in the retirement age (to 67 by 2027) of baby boomers will increase labor supply substantially because this cohort is so large."

Nonetheless, the labor market is undeniably changing, Cappelli says. The dominant demographic event of the last century, the baby boom's entry into the labor market, led what became a long period of economic stagnation, with many workers, especially young ones, finding it difficult to find jobs. From the 1970s through the late 1990s, most employers had an abundant supply of labor, Cappelli says, a situation that made it possible to overlook the gradual decay of human resources practices. "They didn't have to be good at recruiting when overqualified applicants were queuing up at their door, they didn't have to worry about retention when no one was quitting," he says. "They didn't have to develop employees when corporate hierarchies were shrinking and what talent was needed could be hired from the outside. And when companies were downsizing and restructuring, human resource functions were the first thing cut."

Between 1998 and 2001, however, this labor surplus began to dry up and wages sharply rose. Employers, their HR competencies eroded, faced entirely new challenges: For the first time, their employee turnover rates increased dramatically, forcing employers to hire continuously; meanwhile, rapid reorganizations pressured companies to hire employees with new skills and expertise from the outside. "Companies concluded that because hiring alone could not meet their staffing challenges, the problem was beyond their control and must be because of a labor shortage," Cappelli said. "But the problem was that many employers relied solely on recruiting, when in fact retention management should have been at least as important." By the time companies began to create the sophisticated recruitment, retention and performance management programs necessary, the economy began to slide into a recession, and virtually all of the new jobs and retention issues dried up.

Cappelli predicts that when the economy rebounds significantly, companies will once again be ill-prepared. "It would be as much a mistake to believe that the slack labor markets of the 2001 recession have eliminated the challenges facing employers as it would be to believe that we are facing an inevitable shortage of workers," he says. "No one knows whether future labor markets will be tight or slack—it depends almost entirely on growth and productivity prospects in the economy—but it's also fair to say that the persistent labor surpluses from the baby boom may not be back any time soon."

Employers, he argues, must develop competencies in recruitment and selection, performance management and retention policies, and an important part of these practices are skills in managing older workers.

"The days of lifetime employment and seniority-based systems are largely over now as companies move toward models of contingent work, independent contracting, and more free-market arrangements," Cappelli says. "There's a tremendous fit possible between the enormous pool of older workers re-entering the market and these flexible work systems if employers can create policies and practices that accommodate older workers."

Other researchers are more alarmist. "The problem is pretty clear," write the authors of "It's Time to Retire Retirement" in the Public Policy & Labor Report. "Workers will be harder to come by. Tacit knowledge will melt steadily away from your organization. And the most dramatic shortage of workers will hit the age group associated with leadership and key customer- facing positions." Several key sectors—health care, education and retail—are most likely to feel the pinch.

Despite "irrefutable" evidence of workforce aging, most recruiting, training and leadership development dollars are directed toward younger employees—actions tantamount to "marching their companies straight off a demographic cliff," the authors continue. A recent survey by the Society of Human Resource Management found that two-thirds of U.S. employers don't actively recruit older workers, 80 percent don't offer flexible work arrangements or other incentives that tend to appeal to older workers, and more than half don't actively work to retain key older workers.

A growing number of companies, however, are forsaking their one-size-fits-all HR policies, and the reason, experts say, is to connect or reconnect with mature employees.