Global economic growth is at risk because of persistently rigid labor markets in advanced economies, warns a recent report from the McKinsey Global Institute. The study, “Help Wanted: Analyzing the Labor Market Challenge in Advanced Economies,” emphasizes that this problem is not a temporary effect of the pandemic, but a long-term trend that has been reinforced over the past two decades.
The report highlights that the ageing population and slowing population growth are exacerbating the lack of available workers to fill vacancies in key sectors. This labor shortage has prevented many businesses from meeting demand for goods and services, which in turn slows economic growth.
Tomás Calleja, a senior partner at McKinsey, pointed out that “the increase in vacancies implies that a significant part of economic demand is not being satisfied, which can slow down the expansion of economies.” Despite progress in finding qualified personnel in the technological field, since 2015 it has become even more difficult to find workers with physical and manual skills.
The study, which analyzes 30 countries and projects future data by sector, reveals that if the vacancies in 2023 had been filled, The gross domestic product (GDP) of advanced economies could have grown by an additional 0.5 to 1.5%.
To mitigate this crisis, McKinsey highlights the urgent need to adopt technologies and develop training programs that improve productivity and expand the labor supply. According to the report, the adoption of artificial intelligence and automation, as well as worker training initiatives, will be crucial to address the challenge of labor shortages in the medium and long term.
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Given this situation, businesses will need strategies to address persistent labour shortages, from adopting technologies that drive productivity growth to expanding their sources of employment, including immigrants and non-standard workers.
Labour shortages have been evident in a variety of countries, all at an advanced stage of development, with no obvious common characteristics. The problem is particularly acute in seven countries – the Czech Republic, Germany, Japan, the Netherlands, Norway, Singapore and the United States – where There are more vacancies than unemployed people. Together, these countries represent the 53% of the total labor supply of the 30 advanced economies analyzed and 64% of collective GDP.
Furthermore, in seven other countries, such as Australia, Canada and United Kingdomthe number of job vacancies is 0.5 or 1.0 times the number of unemployed. In all eight major economies studied, labour markets have shown signs of retreating from the very rigid levels reached during the COVID-19 pandemic, approaching conditions similar to those that existed before the virus. However, Italywhose labor market was one of the most relaxed before the pandemic, still shows no signs of flexibility. This could be attributed to the generous fiscal response of the Italian government during the crisis, which exceeded 45% of GDP, the highest among advanced economies.
On the other hand, JapanJapan, whose labor market was tight before the pandemic, has not returned to that trend due in part to the depreciation of the yen that has increased costs in its import-dependent economy. Even so, job openings in Japan still outnumber job seekers by 1.2 times.
However, not all major economies are facing labour shortages. For example, labour markets in France and Italy They are relatively lax, as in 14 other countries out of the 30 analysed, which together account for 31% of the labour supply and 20% of total GDP. However, even in many of these countries, labour markets have tightened, with the number of vacancies per unemployed person increasing fivefold in Italy and almost fourfold in France.
When did the problem start?
The tightening trend began after the 2008 financial crisis, when the number of job vacancies was exceeded by a high number of unemployed. The recovery has been slow, taking an average of 8.2 years to reach the pre-crisis degree of rigidity. Hiring intentions continued to rise and labor markets continued to adjust until the pandemic hit in 2020. During this period, many labor markets have oscillated between large slack and extreme tightness. Generous fiscal stimulus during the crisis facilitated a relatively rapid recovery in employment, reaching the highest job vacancy-to-unemployment ratio in two decades in 2022. Currently, while labor markets remain historically tight, they have shown a slight cooling. For example, in April 2024, the U.S. job vacancy-to-unemployment ratio fell to 1.2 from 1.4 at the end of the previous year.
Since 2010, GDP growth in many countries has been driven primarily by employment growth rather than productivity improvements. In countries such as Australia, the United Kingdom, and the United States, labour availability has made it easier to hire more workers and extend working hours. In contrast, countries with less labour availability, such as Germany and Japan, have had to rely more on productivity growth, although this has not compensated for weak labour force expansion. Labor productivity has stagnated in many advanced economies, as documented in previous McKinsey Global Institute reports.
Although all countries experienced a slowdown in productivity following the financial crisis, some were hit harder than others. AustraliaThe commodities boom has benefited productivity, while in the UK the lack of investment in regions outside the South East may have made matters worse.
Since the crisis, the excess supply of labor has diminished. In 2010, there were about 24 million excess workers compared to vacant positions.. Today, the number of job seekers is approaching the number of job openings. However, this situation varies at the national level. By the end of 2023, demand for labor exceeded supply in Germany, Japan, and the United States. In response, Germany has implemented laws to increase immigration of highly skilled workers, while initiatives to study and address labor shortages are being considered in the United States.
On the other hand, France and Italy still have excess unemploymentalthough their numbers have decreased considerably compared to the pre-pandemic peaks. In France, the difference is two million and in Italy one million, or 7.1% and 5.7% of overwork respectively.
The reasons for rigid labor markets vary across countries. Unemployment rates in Germany, the United Kingdom, and the United States have fallen from their 2010 peaks, while Australia has never had very high unemployment rates. Italy still has relatively high unemployment, but has also seen an increase in job vacancies, suggesting a possible disconnect from the market. In Japan, demand has increased sharply, but population decline has limited labor supply.
There is no match between supply and demand
Job openings growth has not kept pace with employment growth, dividing sectors into four categories: “labor hungry,” “employment attractive,” “disruptive,” and “labor efficient.”
THE sectors with labor shortages, such as health care and constructionare facing demand that is growing faster than their ability to attract workers. Despite efforts by countries such as the UK to recruit migrants, these sectors are still experiencing an increase in vacancies. On the other hand, employment-attracting sectors such as financial services and real estate have been creating jobs faster than their demand for labour, but only the professional services sector has seen its share of vacancies increase.
He Manufacturing is seen as disruptivebecause it has lost a significant share of jobs to automation, even as vacancies have increased. Instead, commerce has been efficient, improving productivity through automation and mitigating the impact of labor shortages.
Productivity and its growth are key drivers of the increase in vacancies; low-productivity sectors have seen their vacancies increase more sharply. For example, The U.S. leisure and hospitality industry increased productivity by 6.4% by automating processes and raising wages.which reduced its vacancy rate.
Demand for physical and manual skills has also increased, particularly in sectors such as catering and construction, which require these skills and face automation challenges. At the same time, occupations with fewer vacancies tend to rely more on social and emotional skills.
In a tight labor market, wages have risen, especially in lower-paying jobs. Wage dynamics have changed as workers seek higher-paying jobs, benefiting job changers.
SO, The sectors most affected by the labor shortage are those least sensitive to automation and artificial intelligence. These sectors rely heavily on physical and manual skills, limiting the impact of automation and AI. As a result, vacancies in these areas will remain difficult to fill, as they cannot be easily replaced by technological advances. Since 2015, the number of vacancies requiring physical skills has increased more than those requiring technological knowledge, although a deficit of technological profiles also persists.
Slowdown towards 2030
Labor supply growth in advanced economies is expected to slow further around 2030. Two scenarios were considered for participation rates: a stable scenario, where these rates remain constant, and a growth scenario, where the trends from 2010 to 2023 continue. In the first scenario, countries such as France, Italy, Germany and Japan could experience a decrease in their labour supply. In contrast, Australia, Canada, the United Kingdom and the United States will likely experience an increase, albeit at a slower rate, thanks to expected higher immigration.
To sustain economic growth, it is essential that countries increase their labour supply and improve productivity. Four economic growth scenarios were assessed, considering different productivity growth rates as well as the two labour force participation scenarios. Even assuming adequate labour demand, any recession could affect employment. Despite sluggish growth in Germany and Japan, new technologies could boost productivity. However, without increases in labour force participation or productivity, GDP will grow more slowly than in the 2012–2022 period.
