Too Many Workers? Not for Long

Employers face a wrenching manpower and skills shortage

Peg Brubaker can't get relief--not from the spike in unemployment that began last year or even from the many layoffs in New York after September 11. She still can't find enough workers for the 15,000-employee New York Presbyterian Hospital, where she's vice-president for human resources. Skilled jobs are the toughest to fill. To hold on to $50,000-a-year ultrasound and X-ray technicians, she has hiked pay twice in the past year, a total of 7%, on top of annual merit-pay increases. Histotechnologists, who are paid about $43,000 to do tissue exams, got three extra salary adjustments totaling 13%.

So scarce are employees who can do such jobs that Brubaker recently threw in $10,000 in employee tuition assistance, up from $2,000, for anyone who will go back to college in these fields. Her hope: that even laundry and other low-skilled hospital workers will switch careers. "All the hospitals and pharmacies were stealing employees from each other, even in a recession, so I'm hoping this will stimulate the supply," says Brubaker.

Most employers aren't yet facing such a squeeze. Any economic resurgence beyond the first quarter remains uncertain, and the U.S. has a ways to go before the labor markets return to their tight-as-a-drum levels of the late 1990s. With the jobless rate hitting an eight-year high of 6% in April, only a few companies are scrambling for help--mainly in a handful of hot industries such as health care and construction.

Focused as they are on today's problems, most companies aren't looking too far around the bend. But when they do, they're in for some big surprises. As the economy strengthens, say demographers and economists, labor shortages will come roaring back. What's more, they're likely to persist for years, even decades. The reason: a looming crunch that will hit as huge numbers of boomers retire and fewer new workers fill the pipeline. With more than two-thirds of women already working and with immigration at record highs, the growth of the labor force will remain at a crawl for decades to come (charts).

The prospect of more or less permanent labor shortages could set in motion profound changes in American business and society. Three decades of plentiful workers have given Corporate America great leeway to shape employment to its needs. But soon, the balance of power will shift to workers, forcing employers into wrenching adjustments.

The late 1990s may well have been a foretaste. Remember all those pay raises and hiring wars? The new day-care centers, flexible work hours, and training programs for welfare moms? Get ready for a replay. "If employers thought the '90s were the decade of the worker, the next decade will be even more that way," says Harvard University economist Dale W. Jorgenson.

America's famously nimble employment system will come under mounting pressure. Today, employees shift from job to job and shoulder much of the responsibility for a career that isn't tethered to one company. Relatively fluid labor markets help boost productivity and profits, economists believe, by channeling labor to companies and industries with the most promise. But if companies become hard up for labor, managers will try to hang on to workers the way they did in the 1950s and 1960s. Employers may feel the need to rewrite pensions and early-retirement plans to keep aging boomers. Indeed, Americans' entire view about when to retire could alter if companies encourage longevity on the job.

The effects could go deeper, too, shifting workplace and societal attitudes in the process. Diversity efforts, always slow to bear fruit, could take on new urgency as employers discover they can't rely so heavily on the native white labor pool, which will shrink by 8 million through 2020, according to demographic projections by David T. Ellwood, an economist at Harvard University. He has analyzed the trends for an upcoming study of the labor-shortage outlook by Colorado's Aspen Institute, a group of business and political leaders. Immigration, too, could become a less divisive issue as the need for workers becomes more acute.

College-educated workers may be the most coveted. So school reform may gain even more political currency than it has today. The states and Washington could feel growing pressure to allocate more money to education, including more financial aid to poor students. Job-related training could see a big boost as well. If employers can't find enough skilled employees in the U.S., they may shift more white-collar jobs abroad or push the federal government to expand the H1(b) visa program again. Warns James E. Oesterreicher, a former chairman of J.C. Penney Co. who helped prepare the Aspen Institute study: "The U.S. faces a worker gap and a skills gap--and both are right around the corner."

An important swing factor, of course, is productivity. Some economists making projections decades out assume a 1.5% productivity-growth rate--the average over past 30 years--and conclude that the U.S. could be short by as many as 10 million workers by 2010. But assume higher productivity growth, and some of the bottlenecks ease up. If the U.S. manages to hold onto today's 2% annual productivity growth over the long run, some estimates of the labor shortfall over the next decade drop to 3 million. The rosiest scenario paints a picture of strong economic growth with high productivity, which would make it much easier to handle any imbalance in the labor markets. In that case, "we could get a virtuous circle," says Paul S. Hewitt, principal author of a two-year study on global aging released in March by Washington's Center for Strategic & International Studies. Still, there's no guarantee. High productivity and labor shortages can co-exist: Jorgenson and others point to the fact that the worst U.S. labor shortages of the past century came in the late 1960s and l990s, both eras of strong productivity growth.

No matter which economic projections come true, the demographic challenges ahead are inescapable: There will be a sharp slowdown in the number of people entering the workforce. Since 1980, the U.S. workforce exploded by 50%, adding some 38 million people as baby boomers hit their prime and as women flooded into the workforce. Now, baby boomers are aging and nearly 80% of women hold jobs outside the home. By 2020, the labor force is set to grow just 16%, adding fewer than 20 million new workers, according to Ellwood's projections. And that's assuming immigrants continue to pour in at the record high pace of recent years.

Labor-force growth began to slow in the 1990s, posting average yearly gains of 1.2%, about half the pace of the 1970s but still equal to the increases of prior decades. Now, benefits consultant Watson Wyatt Worldwide figures that the growth rate will drop to a 0.8% annual rate over the next decade, then gradually slide to a mere 0.2% a year for as long as anyone can predict.

Employers could be so strapped for help that they find themselves radically redesigning American work habits to lure people into their ranks (table). For one thing, older workers could suddenly take on value as a brimming pool of labor. The ranks of men 55 to 64 will swell by a third, to 20 million, by 2020. With life expectancy lengthening and with Americans staying healthier far longer, employers and the government may try to entice more of them to put off retirement. Proposals to postpone the Social Security retirement age, to 70 years old, are cropping up in policy circles. Companies will likely scrap plans that encourage retirement in the mid-to-late 50s and build in incentives to stay on.

The rewards will need to be high. Already, 68% of men 55 to 64 are working. That figure would have to jump to 74% by 2010, according to Watson research director Sylvester J. Scheiber, to add just 1 million more men to the rolls. Ultimately, "what will win out, [greater incentives to work] or the desire for more leisure?" asks Steve Goss, chief actuary at the Social Security Administration, whose labor force projections underlie the studies by Watson and others.

Getting more women working might seem to hold the most potential in terms of sheer numbers. The share of women who join the workforce has climbed steadily, from 43% in the early 1960s to 77% today. Every percentage-point increase beyond would mean 1 million more workers by 2010, Scheiber calculates. What's more, many nonworking mothers are well-educated and have college degrees, so they would go a long way toward solving skills shortfalls.

But women coming out of school now are entering the workforce at a lower rate. To lure more of them into a job, employers may have to offer everything from more flexible hours and part-time work to on-site day care and sick-child backup care. "For most of our life times, people have worked the hours their employers wanted them to," says Oesterreicher. "Now, employers will have to become more flexible."

One relatively untapped source: the low end of the labor market, especially less-educated women. In Colorado Springs, the Broadmoor Hotel has about 200 openings out of a workforce of 1,500. Among the toughest to fill are housekeeping and laundry jobs--low-skilled work that nonetheless pays $7.50 to $10 an hour in that neck of the woods. "We offer health benefits even to our part-timers, and we're now doing new market surveys to see if we need to raise wages again," says human resources director Cindy E. Clark.

One solution is to hire right from the welfare rolls, which was popular in the late 1990s. Bank of America never stopped doing so, in part because it's worried about long-term demographic shifts. The company set up a partnership with Goodwill Industries International Inc., which trains welfare recipients and others for such jobs at BofA as cashiers and tax processors. BofA has hired some 5,000 people this way since 1998 and still brings in 150 a month. "We're mindful of the labor-shortage projections and see these populations as continuing to provide us with a wonderful source of labor and higher retention rates," says Karen B. Shawcross, a BofA senior vice-president.

Corporate America's biggest difficulties, though, will come at the high end of the labor market. The number of workers with a college degree has more than doubled since 1980, to 40 million, lifting the share of workers with a BA from 22% to 30%. Even so, the rapid expansion of supply barely kept pace with demand. Wage hikes for college grads beat inflation by more than 2% a year in the late 1990s, according to the Economic Policy Institute, a Washington think tank.

So far, the economic slowdown hasn't changed the picture much. High-end workers still won inflation-adjusted pay hikes of around 2% or so in 2000 and 2001. Even the ravaged market for tech workers seems to be turning around. The high-tech workforce fell by 5% last year, to 9.9 million, according to a survey of 532 companies released on May 6 by trade group the Information Technology Association of America. Now, employers say they expect to hire 15% more tech workers this year as the economy rebounds. At the Treasury Dept., about 11% of its 9,500 information-technology workers are currently eligible for retirement, a figure that will jump to nearly one-third by 2008, says Dagne Fulcher, who manages workforce programs. With pay often higher on the outside, Treasury has been doling out retention bonuses of up to 25% of pay to hang on to its techies.

Finding enough college-educated workers will be tough if the demand for skilled labor continues at the pace of the past two decades. For one thing, the echo baby boom simply isn't large enough. At 64 million people, the generation that started hitting college in 1998 is 8 million larger than the prior Gen X cohort. But the boomers numbered 76 million. So even if more of their kids go to college, the ranks of graduates won't grow as rapidly. "If we could jack up enrollment rates, we would come a lot closer to meeting the demand for skilled labor. But that's a tall order," says Anthony P. Carnevale, a training expert at Educational Testing Service who has written on future workforce-education needs.

Indeed, many Gen Yers may not be able to make it through college even if they want to. About 85% of the growth in 18-to-24-year-olds will come from minority and immigrant families over the next decade, according to Census Bureau data. More than 40% will come from low-income families. Many of these students are already caught between rising tuition and shrinking financial aid. Federal Pell grants, which go to poor students, now cover only 57% of the cost of a public four-year college, down from 98% in 1986, according to a report by the National Center for Public Policy & Higher Education, a nonprofit group. State help for needy students has fallen by similar amounts. So today, college tuition consumes fully a quarter of low-income families' annual income, vs. 13% in 1980, the study found. Already, college enrollments have slumped by nearly 2% since their peak in 1998. "It would be almost impossible to match the skills increases of the past 20 years," says Ellwood. "If you believe that technological change isn't going to slow down, we're not going to have enough college-educated workers to meet the demand."

While a slower-growing workforce presents tremendous hurdles for the U.S. and the rest of the industrialized world, it brings opportunity as well. The supply of workers is growing more slowly because the overall population is reproducing at a lower rate, too. So living standards may rise even if worker scarcities slow economic growth somewhat, simply because there will be fewer extra people over whom to spread the national income.

A somewhat slower growth rate would also mean less pollution, less suburban sprawl, and less pressure on the environment. Of course, if the economy eases too much, there wouldn't be enough output to keep pace even with a slower-growing population. But if the workforce and the economy rise in tandem, the country's shifting demographics could end up as a blessing as well as a challenge.

By Aaron Bernstein in Washington

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