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Inward Investment Guides
Where Has All My Labor Gone?
Changing demographics are likely to alter corporate location and growth strategies as well as the policy decisions of economic development organizations.
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.

Trouble Ahead
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.

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