Reports of our labour shortage greatly exaggerated

No evidence to support claims of impending shortage: experts

HR professionals can relax and get some sleep — there will not be a labour shortage after all, at least not any time soon, according to two leading workplace and demographics experts.

Predictions of imminent and massive labour shortages as baby boomers pour out of the labour force have become widely accepted in recent years. In fact, it has come to shape almost every discussion about HR, much HR strategic planning and even government policy, said Pete Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School of Business.

The problem is there is almost no evidence to support the claim, he said.

Cappelli took apart this conventional wisdom in a study published in the August issue of Organizational Dynamics. “The assertion that the labour force will be smaller in the years ahead is simply wrong,” he wrote.

It’s an opinion shared by one of Canada’s best known demographic experts, David Foot, author of Boom Bust & Echo 2000: Profiting from the demographic shift in the new millennium.

Predictions of labour shortages are nonsense, he said.

Studies that focus on the relatively small number of employees directly behind the baby boomers, the so-called baby bust generation which is smaller than the baby boomer group, risk painting a fundamentally flawed picture of the future, he said. Those studies ignore the generation of workers coming behind the baby bust generation, and forget that most baby boomers still won’t be retiring until at least the end of the decade.

“We can’t retire the boomers too quickly,” he said. The peak of the baby boom generation is still only about 42 years old. “They will not retire for another 20 years,” he said. There are a few areas, particularly in the public sector, that will face more retirements sooner. “But for most occupations, boomers will not retire until the end of this decade.”

With the large echo generation by then already in the workforce there is no reason to believe Canada will face a labour shortage. Far from it.

“There is increasing evidence that there is a labour surplus,” said Foot. As the echo kids enter the workforce, “the challenge is going to be finding them jobs,” he said.

“It is exactly the opposite of the perceived wisdom that is out there.”

Cappelli also points out that, in part, the misconception about labour shortages stems from a failure to account for the echo generation and the erroneous assumption that retirement patterns will remain unchanged. That is unlikely because more people will want to work longer as life expectancies continue to increase, and because more employers will entice people to postpone retirement, he said.

“If they delay their retirement by just a little bit, the labour force effects are big,” he said in an interview. With people working longer, the average age of the workforce will likely increase, he said. But an older workforce is not a bad thing. In fact, the quality of the workforce could improve as experienced workers continue to contribute until later in life.

Population changes happen very slowly, and the impact on labour supply is almost insignificant, he said. At most, demographics will account for a change in the U.S. labour supply of a few hundred thousand in a workforce of 150 million. Meanwhile, changes in demand can affect the number of jobs by several million. “In short, if you want to predict how tight the labor markets will be, forget about demographics and focus your bets on predicting the business cycle,” he wrote.

How did the idea of a shortage become pervasive then? Consulting firms have to accept some of the blame, said Cappelli. “They saw an opportunity to raise an issue and drive solutions.”

Foot attributes it to the natural fears of businesses to any reduction in labour supply. In a booming economy in the late ’90s, businesses misconstrued a tight labour market for a shortage.

“Businesses get very nervous when the unemployment rate goes down because it drives up wages,” he said. So when the unemployment rate dropped, employers began calling for higher levels of immigration. And yet there is a great deal of evidence to suggest employers didn’t actually hire those immigrants, he said. Far from facing a shortage, the result will be a surplus of labour for years to come. “Businesses have always had a preference for higher unemployment because it keeps wages under control.”

Earlier this year, a Statistics Canada report on Canada’s future labour force was widely reported in the media as evidence employers will face massive labour shortages as baby boomers retire.

Deborah Sunter, director of the labour statistics division for Statistics Canada, believes the coverage was slightly misleading.

“We’re not saying there will be a shortage,” she said, adding that the potential exists, given the rapidly aging population.

It is a very complex issue and the actual results depend on a number of factors, including how many people come into the labour force and where, the ability of educational facilities to graduate new workers, as well as the ability of organizations to retain older workers.

“Boomers are almost half of the labour force and 10 years from now they will be in that zone to retire. It doesn’t mean they will retire,” she added.

The labour market usually adjusts to meet these kinds of challenges, but it will have to adjust faster than in the past if shortages are to be avoided, she said.

“This is simply a very important phenomenon that we are facing in the labour force that deserves to be highlighted and to be paid attention to,” she said. “Adjustments need to be made.”

The unlikelihood of a labour shortage does not mean employers won’t face new challenges as the baby boomers age, said Cappelli. But, he added, to characterize those challenges as stemming from a labour shortage will cause employers and governments to chart the wrong strategy.

Even though there is little evidence to support the theory that the labour supply is shrinking, many employers have “a gut feeling” things changed in the late ’90s, he said. The labour market was tighter than it had been in many years, but it is not correct to call it a shortage. Many employers had never experienced a tight market and were unaccustomed to having to hire from outside the organization for anything other than entry-level positions.

Increased outside hiring also led to higher quit rates and turnover, which puts employers in a state of continuous hiring, explained Cappelli.

“Employers could be forgiven for thinking that this situation looked like a labor shortage: Despite flat-out hiring, they could not bring in enough workers to meet their needs,” he wrote.

But rather than calling for increases in immigration, or focusing too much energy on increasing recruitment, employers are better off honing retention strategies and refining the recruitment process to improve the quality of new hires, said Cappelli.

“That means uncovering the right applicants who truly fit the jobs. Those better matches not only lead to better performance but also to reduced turnover. Better fits begin with the nuts and bolts of human resource work — identifying the competencies truly needed in jobs — and end with crafting distinctive value propositions that attract and retain the applicants with those competencies to those positions.”

To read the full story, login below.

Not a subscriber?

Start your subscription today!