The war for talent

Why your HR department better get a move on

Much has been written about the huge demographic shift that is underway right now.  However, most of the articles that I come across on this subject tend to focus on one aspect of this shift, namely the fact that (at least in most of the Western world and Japan) the population is ageing rapidly.

To be sure, this fact has enormous consequences, especially on retirement pension systems around the world.  But I’ll discuss that elsewhere.  For now, I’d like to focus on a different part of the problem: What happens to your country, your industry, and your company, when the number of young people joining the labor force shrinks significantly?

 

The trend behind this situation

Let’s start with a brief recap of why we are in this interesting situation.  In every country, a certain number of people die each year, and a certain number of babies are born to “replace” them in the population. Statistically, if the number of babies born to each woman of child-bearing age is 2.1, then the number of children added to the population compensates more or less exactly for the number of people leaving it (i.e. dying).  Result: a steady population.  If this “fertility rate” is above 2.1, then the population will grow.  If it is below 2.1, it will shrink.

For various reasons (among them: increased access to contraception; high numbers of abortions; societal pressures on women to have a career; and greater financial independence for women, allowing them to postpone marriage and childbirth, leading to smaller families), the fertility rate in the industrialized world has been falling for several years.  In Europe, for example, the fertility rate in the period 1970-1975 was 2.16, just above replacement rate.  According to the UN, by 2045-2050 it is projected to fall to 1.47.

In some countries, it has already dropped quite dramatically. In Italy, for example, the fertility rate in 2010 was 1.32. Let's extrapolate from this number.  With a fertility rate of 1.32, one hundred Italians who marry today – 50 men and 50 women – can expect to have a total of 66 children.  If the fertility rate stays the same, those 66 children (assuming 33 boys and 33 girls) will bring 44 grandchildren into the world, and in turn, those 44 grandchildren will have just 29 great-grandchildren.  From 100 individuals to just 29, in only four generations!  If this projection is accurate, Italy is in trouble.

 

In Italy, a women's magazine recently published a survey of their readers, aged 16 to 24, and found that 52% said they plan to have no children.

 

What does it mean for a country to be losing population like this?  Children who are never born can’t grow up and enter the workforce, so as older workers retire, the total labor pool shrinks because they aren’t being replaced by sufficient numbers of new workers.

 

What does this mean for countries with a shrinking labor force?

Forecasts for Europe and Japan are dire.  For example, Germany’s labor force is expected to shrink by 6 million between now and 2030.  Other countries face a similar situation.

At the level of the overall national economy, shortage of labor on this scale obviously spells big trouble.  Economic growth will slow.  Talent (which every company needs, no matter how you may define it) becomes harder to find.  Truly talented people leave to pursue opportunities somewhere with a more promising future.

Are there any solutions in sight?   (Other than reversing the trend by having more babies, of course.)

One possibility is to import labor, via immigration.  But do the math.  The sheer numbers necessary would be staggering.  If Europe wants to keep the number of people aged 15 to 64 at the same level as today, then 169 million immigrants need to be welcomed to the continent between now and the year 2050 – that is the gap between today’s total labor pool and the smaller labor pool that will exist then, thanks to the lower birthrate.

That’s a big number.  But in fact, it isn't enough.  Even more workers will be needed, because what is important is not maintaining the total number of workers, but maintaining the number of workers per retiree.  The ratio has to stay the same, or else there won’t be enough workers paying into the social security funds to pay the retirees.

11 Changes - Pension Problems

Right now, across Europe that ratio is about 4.8 workers to 1 retiree.  To maintain that ratio, over the next 40 years Europe would have to import… 1.4 billion workers!

Is that even possible?  Where on earth would these workers come from?  Today, for example, many northern European countries import labor from Spain, Portugal, Italy and the Balkans.  But merely shifting workers within Europe won’t solve the problem.  Besides, a generation from now, none of those “donor” countries – or any other country in Europe, for that matter – will have any workers to spare.  Instead, importing labor means bringing it in from somewhere with fertility to spare: Africa, the Middle East, Latin America or Asia.

But that brings with it a host of other problems linked to the difficulties of integrating people of different cultural backgrounds. Would this be politically acceptable?

 

So what does this mean for your company?

Every business, every organization needs manpower to do the work that sustains it and allows it to grow.   So no matter how a country or region might choose to approach this labor shortage problem on a macroeconomic level, every single company that expects to hire staff in the next 11 years will also be facing a shrinking market for talent, even if it doesn’t seem acute at first.

This means that companies should be developing a recruiting strategy now that will ensure that they'll be successful in getting the talent they need to manage and run their operations as the years go by, and the talent pool shrinks even more.

Over the next 11 years, recruiting is going to get a lot more competitive.  It’s safe to predict that companies will find themselves competing for talent more and more against organizations they never encountered in their domain before.

For example, a few years ago, when I was working at the Ecole hôtelière de Lausanne (EHL), the well-known hospitality management school in Switzerland, the companies that recruited the school’s graduating students were almost exclusively large players in the hospitality sector.  These hotel chains all had starting salaries and employment packages that had been benchmarked against each others’ offers and consequently were all about the same.  The competition for talent was almost entirely intra-industry.  Nobody had to worry about a spoiler coming along who would snap up the best graduates with offers that were out of the ballpark.

Today, however, a host of companies come to recruit at EHL that were never interested in hotel school students before.  World-class firms in the banking, consumer products and consulting sectors now vie for top talent at the school, and they offer employment packages that make the hotel chains’ offers, with their relatively low salaries and long hours, look pretty meager in comparison.  The result is that the top students almost invariably take one of these more attractive packages – and thus never even enter the hotel industry.  A shame for the companies who are losing out in their new competitive set.  Even more, a loss for the hotel industry as a whole.

This “war for talent” is only going to get tougher.  I see three main strategic options that organizations will have to choose from when they go “fishing” for talent:

 

  1. Go fishing with the most attractive lures you can afford.

Talent will not be attainable on the cheap any more.  With more companies competing for this increasingly scarce resource, companies will have to (a) know who they are competing with, and (b) be prepared to invest what it takes to attract talented people.  This means offering truly competitive salaries, employment packages and working conditions.   It’s an expensive proposition, but a necessary one.

If they don’t step up and improve their terms of employment, they can expect to lose out more and more frequently – either in the recruiting phase (i.e. they’ll be left with less talented candidates to chose from) or later, when they’ve hired and trained the employees only to see them defect for better offers elsewhere.  Either outcome is costly for the companies affected and hurts their competitiveness.

11 Changes - Go fishing

 

  1. Go fishing for different fish.

Companies that can’t (or won’t) compete effectively for increasingly rare young talent may find that it pays to turn their attention to another target group completely: older people.

True, older hires won’t have years of service to offer.  (But then, can you really count on years of service from anybody these days?)  That said, there are many advantages to hiring older employees, such as their relative maturity, reliability, loyalty and experience.

And given the expected demographic dynamic, the number of older people in the market will be growing!

11 Changes - Go fishing

 

  1. Start fishing in new ponds.

Another option for companies that can't compete for talent with the “best” employers - or choose not to - would be to cede the pond to these “big boys” and go look for talent somewhere else.

This strategy could entail:

  • Recruiting at different - perhaps unconventional - educational institutions. This is what the banks and retailers were doing when they started recruiting at a hotel school;
  • Importing talent from abroad, i.e. from countries where the company’s offer beats out local competition;
  • Poaching talent that has already been selected, vetted and trained by competitors.

11 Changes - Start fishing

No matter which of these three strategic options a company decides to pursue to ensure access to scarce talent, perhaps the most important way to win the War for Talent is to keep the talent you’ve already got.

I believe that employee retention will become one of the chief strategic challenges - maybe even the chief challenge - of the next 11 years.

 

 

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