What Labor Shortage? Debunking a Popular Myth. The coming labor shortage. (page 3 of 3)

Unless the economy is operating at absolutely full employment, and it almost never is, the supply of labor exceeds the number of jobs. Moreover, surplus labor, measured by the unemployment rate, often numbers in the millions. Slow growth in the labor force, therefore, can only constrain economic growth if the economy enjoys full employment, which is a rare occurrence.

"The upshot of my study is that the labor force is not shrinking," Cappelli tells Knowledge@Wharton. "The baby-bust cohort is being followed by an even bigger cohort now in their 20s, and baby-boom workers simply will not be retiring from work in the numbers that many people expect. People keep talking about the 'coming labor shortfall.' Well, they were talking about the 'coming shortfall' 10 years ago, and they're still talking about it today, but we haven't seen it. Demographics don't drive labor markets. Demographic changes are gradual and predictable, and the economy and the labor force have enough time to adjust to them."

Making the assumption that a labor shortage is on the horizon is a serious mistake because corporations and public-policy makers may make important decisions based on such an assumption. "The bigger the corporation, the more they buy into the labor-shortage argument," says Cappelli. "The bigger companies are the ones with the ability to think long-term and worry about the future."

One implication of Cappelli's paper is that it undercuts the argument that the United States needs to boost immigration or else jobs will go unfilled. "There was an enormous lobbying effort from the business community to expand immigration several years ago," he recalls. "But there's no good argument for sustaining the view that we have to expand immigration because there is no basis to the view that there aren't enough people to fill jobs."

If there is no impending shortage of labor, why do employers feel that the tight labor market of 1998 to 2001, when companies faced the challenge of finding workers and wages rose sharply, somehow represented a major shift from what they had known before and presaged a bleak future? One reason, Cappelli believes, is that the pressure to hire laterally from the outside to bring in new skills, which was accelerated during the late 1990s, is a new development in the history of human-resources management. The breadth of jobs that today are filled from the outside - ranging from the mailroom all the way to the CEO's office - stands in stark contrast to years gone by when recruiting was almost entirely focused on entry-level positions. An increase in outside hiring contributes to higher turnover, which forces employers to be in a state of continuous hiring and gives rise to the feeling that there is a shortage of workers.

"Even though there may have been no overall shortage of workers [from 1998 to 2001], the fact that many of those workers were moving from one employer to another generated widespread vacancies that could not be met by the level of hiring most firms were capable of sustaining," the study says. "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. Retention management should have been part of the solution along with performance management to identify who were the truly important people to retain."

Making Improvements
As the economy strengthens, employers may once again face the prospect of tight labor markets. But instead of fearing a non-existent workers' shortage, companies should invest in a range of responses to meet their labor needs, Cappelli argues.

Most firms have to improve their recruiting, but doing so requires more than just coming up with more applicants or filling vacancies more quickly. The overarching goal should be to make better matches between applicants and jobs. That means uncovering the right applicants who truly fit the jobs they apply for. Matching the right person to the right job not only leads to better performance but also to reduced turnover, according to the study.

Says Cappelli: "The wrong implication to take away from the study would be to say there's no reason to worry about anything concerning employment because there's not going to be a labor shortage. A tight labor market can come back in matter of months if the economy picks up steam. The real issue then will be to have a system of practices in place of finding good people, hiring them when you need them and keeping the good ones."