Darin Buelow, Brad Lindquist, and Ai Li Ang , Global Expansion Optimization, Deloitte Consulting LLP (Jun/Jul 08)
Attracting and retaining talented employees is an ongoing concern for most companies - and has been for decades. Location strategists, those who think about where to deploy corporate operations, do their best to evaluate an area's labor market before deciding whether to recommend an area for a new facility or function. Each location exhibits nuances in terms of specific skill availability, wage levels, labor management relations, and productivity; but historically, most states and metro areas have been able to provide the raw number of workers to meet companies' needs.
The real (or perceived) imbalance between labor supply and demand helped shape how regions themselves competed for new jobs. Economic development organizations evolved to focus on corporate attraction and retention, and their performance came to be measured in terms of capital investment, enhancement of the tax base, and - most of all - the attraction and retention of jobs for their represented regions.
The objective to create and increase the area's "demand" for workers makes the economic assumption that the supply of workers in the region exceeds the number of good jobs available to them - which indeed has been the case for much of U.S. history. Migration, immigration, and training programs facilitated those willing to "re-tool" their careers, helping to smooth labor supply and demand imbalances in many areas of the nation. In areas where labor tightened, companies did their best to react with human resources policies to attract and retain talent including increased pay, benefits, and non-monetary perks such as flexible work schedules.
However, the war for talent is about to become much more pronounced and painful. Demographic shifts in the United States will soon alter corporate location and growth strategies, as well as the very objectives of economic development.
Still Growing, But Is It Enough?
From its agrarian roots through the current technology-driven age, the United States has generally had more workers than jobs to be filled. The annual U.S. population growth rate has generally remained steady, currently 0.9 percent in 2005-2006 (about 2.7 million people) and is projected by the U.S. Census Bureau to decline only slightly to 0.8 percent in 2030. However, the global phenomenon of population aging is going to begin impacting labor availability significantly in the United States in the very near future.
Consider the population age distribution in year 2000 vs. year 2030 (Chart 1). As has been well documented, by 2030 a significantly larger proportion of the U.S. population will be over 65. While the government struggles with issues such as the Social Security and health needs of the soon-retiring 78 million baby-boomers, the remaining labor pool may very well be too limited to meet the needs of employers. And, unfortunately, the labor participation rates among the baby-boomer generation do not appear to be increasing as this segment ages.
A way to think about future labor needs is to explore the relationship of labor supply relative to GDP. Between 1970 and 2000, the U.S. GDP grew 160 percent. During that same period, the U.S. civilian labor force (CLF) increased 70 percent. Between 2000 and 2030, the Bureau of Labor Statistics projects GDP to grow at a steady, though somewhat lesser rate of 120 percent (assuming an annual growth of 2.7 percent). However, between 2000 and 2030 the corresponding CLF is projected to grow much more slowly, at about only 20 percent. This corresponds to an annual growth estimate of approximately 1 percent from 2000 to 2010 and less than 1 percent after 2010.
While we can expect that advances in technology and productivity will continue to reduce the labor component within GDP, it is also likely that the needs of a 120 percent economic expansion between 2000 and 2030 may not be met by a corresponding expansion in the labor force of only 20 percent.
Can immigration fill the gap? Over 1.2 million immigrants were granted legal residence in 2006, up from 600,000 in 1987 and 850,000 in 2000. Approximately one half of those gaining legal residence were already in the United States and gained residence through a "change of status." Even without immigration reform (which may further limit the total number of legal immigrants), worker immigration would need to increase significantly to impact the potential labor requirements of future economic growth.
While future economic growth will increase the demand for workers, some industry sectors will experience more labor pressure than others (Chart 2). U.S. manufacturers - continually expected to innovate, cut costs, streamline operations, comply with tightening regulations, and return increasing profits - are likely to get the worst of the future labor shortage. Employment in the service industry sectors is projected to continue to outpace that of goods-producing industries, from a ratio of nearly 83:17 in 2002 to 85:15 by 2012.
As fewer and fewer young people seek careers in manufacturing, companies in this sector are forced to pay more to attract, train, and retain them, which may further widen the cost gap between domestically made goods and those imported from low-labor-cost countries. The remaining sizable domestic manufacturers will likely be those who have an intrinsic need to be here, in spite of higher labor costs. Examples include companies requiring raw materials available in the United States and too expensive to transport long distances, those whose final products are either very heavy or have high water content, or defense-related manufacturers that are required by law to produce domestically. These manufacturers will be left to compete for talent in a continually tightening labor market.
As the demand for labor to meet future economic growth outstrips supply, Gen Y workers will have the luxury to be more selective in their career choices. More will likely elect preferred working conditions and/or higher pay, motivating them to pursue technology and service-oriented careers (Chart 3).
To further appeal to the Gen Y worker, which by 2020 will be core of the labor market, employers are likely to increasingly embrace flexible schedules and remote work place arrangements enabled by technology. Since members of Gen Y are typically characterized as strongly preferring to work and live in an area with a wide range of recreational and cultural activities, in the future, living amenities will likely trump low operating costs in many more business location decisions. In a tightening labor market, workers can afford to pick and choose their employers; those who succeed in catering to Gen Y's keen awareness of the work-life "imbalance" of previous generations will likely have greater success in labor retention and attraction.
When combined with immigration and worker migration, the demographic impact of the aging population will create supply imbalances that will impact corporate and policy decisions (Chart 4).
By 2030, five states - Texas, Florida, Nevada, Arizona, and Utah - are expected to experience labor force growth at a much greater rate than the U.S. average, as in-migration and immigration to these states outpaces the effect of retiring workers. On the other hand, projections for 13 states in the eastern Great Lakes, Northeast, and Great Plains are for a smaller to significantly smaller labor force, drawn down by the aging population, low or negative population growth, out-migration, and potentially fewer immigrant workers. Stated more clearly, by 2030 these 13 states are projected to have fewer workers, in real numbers, than in 2000. Another 15 states will experience net growth by 2030 below the estimated U.S. average of 20 percent, a rate already far below the expected pace required to support historical GDP growth.
It follows that states with CLF growth outpacing the projected U.S. average will be in a much better position to support economic growth and, accordingly, will be more likely to achieve success in retaining and attracting business investment. The opposite will likely be true of those states with a declining or slowly growing work force unless they have some other significant compensating quality, such as access to a critical customer or supply base, a low-cost resource, or access to a highly unique set of workers.
The implications for corporate location strategy, in terms of rationalizing the existing footprint and making future location and deployment decisions, are significant. First, companies will need to place much greater focus on near-term and long-term labor market trends as they determine how to retain and attract talent. And, in turn, the location decisions that companies make will have long-term implications on the future success and competitiveness of U.S. regions, states, and municipalities. Cites and regions with sought-after quality-of-life attributes and amenities will continue to emerge as "business location hot spots" due to their appeal to the shrinking, but mobile work force.
Second, the war for talent that has been "simmering" the past decade will slowly but steadily escalate into an all-out boiling conflict for skilled resources. Labor competition will enhance the gap between winning and losing communities as locations for companies seeking the best talent at the lowest price. While employers will continue to look to technology and innovation to minimize the numbers of hourly or line workers required, competition for management, technical, sales, engineering, development, and even production functions will likely stiffen. More companies will adopt flexible work programs to enable workers to contribute remotely and, therefore, increase retention in an increasingly competitive labor market. Wages are likely to increase, forcing more companies to rationalize and balance their U.S. deployment strategy with options in countries with less-expensive and more abundant labor markets. More, and smaller, companies will consider global labor market solutions to remain competitive.
For government and other policymakers tasked with the economic development of their areas, the shift in strategy is likely going to be even more significant. Faced with a flat or shrinking work force, increased social costs, and an aging infrastructure whose replacement requires funding from increased tax revenues, governments will have to determine where the money is going to come from and when. First, for most states, economic development strategies will likely shift from an emphasis on job creation (demand focus) to work force growth and retention (supply focus). Some examples of labor supply policies are already in place, as follows: • The state of Utah, in addition to a more traditional offering of economic development incentives meant to attract and retain businesses, has recently proposed enhanced incentives to companies that relocate employees to the state versus projects that just create new jobs.
* • A medium-sized town outside of Indianapolis offers incentives not only to new businesses, but also to employees of the new business that relocate to the community. Property tax exemptions for new homes built by relocating management employees of new companies encourage both population growth and the ability to capture skilled professional labor.
* • The state of Georgia's HOPE Scholarship Program was introduced in 1994 to encourage academic achievement of Georgians attending secondary and post-secondary institutions in Georgia. This program not only promotes the increased skills base of the Georgia population, but may also encourage Georgia residents to stay in Georgia, enabling demographic stability.
* • Singapore, a country of 4.5 million, has a surging economy and hopes to grow its population to more than 6 million over the next few years to meet the growing demand for skilled and technical workers. Singapore's aggressive Guest Worker program and generous job training grants that allow companies to train new workers in foreign countries and return them to Singapore for permanent work is meant to encourage work force growth and expand the knowledge and skill base of the country.
* • Ireland's open-door worker policy and the expansion of the EU allows for the availability of a large, multilingual work force drawn from the whole of Europe. The number of new direct flights from Ireland to Poland is evidence of the strategy to attract workers at all levels from outside its boundaries and to ensure that companies based in Ireland meet their work force needs.
Second, incentive policies oriented to attract manufacturing projects with large numbers of jobs will need to be re-tooled. Especially in manufacturing, high-labor-content industries are far more likely to locate in low-labor-cost countries, such as China, India, and Mexico, than in the United States. More and more, domestic manufacturing location projects typically are for heavily automated manufacturing processes and/or operations requiring relatively small numbers of skilled workers (less than 200). States and regions that continue to focus tax and other incentive programs exclusively on large employment projects will be at a distinct disadvantage.
Third, the federal government will need to consider raising the H1-B visa cap so as not to further stunt economic expansion. Technology and other high-skilled industries have lobbied for greater numbers of skilled foreign workers to be allowed temporary status as U.S. employees under the H-1B visa program. Currently, the annual quota of H1-B visas issued is 65,000, less than half of the applications accepted by U.S. Citizenship and Immigration Services in 2006. The demand for technical workers has been so strong that the application process was open for only one day, during which 150,000 applications were received.
Unfortunately, the demographic realities of slow population growth and work force aging have been determined and will march forward without compromise. Employers and policymakers who plan and prepare for this reality and develop corresponding work force attraction plans now will be better positioned to retain and attract the resources they will need to compete in the future.
Darin Buelow, Brad Lindquist, and Ai Li Ang are Chicago-based location strategists in the Global Expansion Optimization practice of Deloitte Consulting LLP.
Note: Statistical information in this article was taken from the U.S. Census Bureau, Population Division, Interim State Population