why is there a global labor shortage?

Companies around the world have a persistent challenge to navigate: the ongoing global labor shortage. In fact, two-thirds of the global leaders have experienced a labor shortage in the past 12 months.

And with the rise of breakthrough technologies such as generative AI in the workforce, finding people with the right skillsets for the future is more challenging than ever. 

This talent gap is already an acute issue for some countries, and many common factors across economies are exacerbating the shortage, as well as unique ones, underscoring the need to find solutions, our latest report on Understanding Talent Scarcity shows.

Read on to discover what is driving the labor shortage. 

what is the labor shortage?

Typically, a labor shortage occurs when there are not enough available workers participating in the labor market to meet the demand for talent. In the US, for example, the number of vacancies has exceeded the amount of unemployed people since 2018 and, as of July 2023, there are 1.5 jobs per unemployed person in the country.

This high level of job openings is not only affecting employers in the US. As of late 2023, employers in Europe were struggling to fill just under 1 million open job roles, while employers in Australia are working to fill nearly 400,000 vacant positions. Also, in mid-2023, Singapore had 194 job vacancies for every 100 available candidates.

what are the driving forces behind the labor shortage?

While the impact of the current labor shortage varies by location and sector, it’s undoubtedly one of the biggest challenges in modern history. To overcome this challenge, it’s important to identify the causes behind ongoing labor shortages.

Here’s a look at some of the factors causing this talent scarcity.

1. decrease in core workforce

The availability of talent depends on two things: the number of people of working age and their willingness to work, measured as activity rates. But people’s willingness to participate in the job market differs from place to place.

Some countries, like Australia, the Netherlands, Belgium, Japan, Brazil and Argentina, have had stable rates over time, which suggests their working-age adults have a steady work behavior.

But activity rates in France, Canada and Spain have dropped in the past decade, as people are becoming less willing to participate in the job market. This is a big problem, especially in Europe, where the working-age population is already decreasing, which makes finding talented workers even harder.

Activity rates in mature markets have been declining since 2010 as people leave the workforce. The US has seen a significant decline of 3% since the early 2000s.

But there is a counter-trend emerging in some of these markets. In countries like Japan and Germany, some people in the 65+ age group are choosing to keep working, which is helping to address talent shortages in various industries.

Mental health challenges are also seeing talent leave the workforce. The UK’s  Office of National Statistics reports that one-half of the over 400,000 employees who left the workforce between February 2020 and November 2021 did so due to long-term mental health issues. In the US,  a recent survey revealed that two-thirds of millennials who quit in 2021 cite mental health as the primary reason.

According to the World Health Organization, depression and anxiety alone are costing the global economy around $1 trillion every year.

2. employers not meeting talent expectations on flexibility

Our 2024 Workmonitor findings indicate that talent now ranks work-life balance as more important than pay when making career decisions. Yet there is a potential mismatch between what they want and the flexible working arrangements on offer from employers. 

Almost two-fifths of respondents (39%) said that working from home was a non-negotiable for them, while over a third (37%) would consider quitting their job if asked to spend more time in the office. However, 41% said their employer had become stricter about attendance. 

The flexibility talent is looking for is not limited to location though. Flexible hours were ranked as important by 41% of respondents, compared with 37% who wanted flexibility of location.

3.  historically low unemployment rates

Unemployment rates are low worldwide, despite the recent slowdown in hiring. They are near historic lows in many OECD member countries – in some cases at their lowest for the past 20 years.

Germany, the US, the UK, Japan and Canada are still struggling to find enough talent for many positions. Spain and Italy, on the other hand, are dealing with a lot of people who are out of work.

In countries like Japan, Poland, Germany, the US, Australia and the Netherlands, the unemployment rates are particularly low, and are virtually at "full employment". It has been challenging to find people to fill job openings in these countries for the last few years. 

4. rising job vacancy rates

Job vacancy rates in 2023 have slightly improved, but it's still hard to find either specialized or business-as-usual skills.

In the past decade, and especially after the pandemic, vacancy rates have increased across the board. Recruiting technical and emerging skills like AI is even more challenging due to high demand and low supply.

Vacancy rates in Belgium, the Netherlands, and Germany are currently over 4%. In the US, it's almost double at 7%, which is a big problem for American employers. These high vacancy rates are causing issues with operational performance, revenue generation and innovation in all of these markets.

In many countries, the vacancy challenge has become much worse in the last two years. It was already a problem before the pandemic, but in most countries, the vacancy rate is now twice as high as it was in the previous decade.

5. aging population

Another factor impacting today’s labor shortage is the world’s working-age population. For years, employers in many countries have had concerns about replacing record numbers of retiring talent. For instance, in the US alone, 10,000 people per day reach the 65-year-old threshold for retirement and this rate is expected to continue until at least 2029.

The average age of the global population is expected to increase in the upcoming decades. Studies estimate that by 2030, one in six people in the world will be aged 60 or over and, by 2050, this number will double.

There will be more people leaving the workforce than entering it in the next decade and, longer term, birth rates will continue to decline in developed countries.  

In 75 countries, fertility rates already fall well below the desired replacement rate of 2.1, according to UN and World Bank statistics, an issue that will continue to plague employers for at least the next few decades.

Japan, Italy, and Germany have been experiencing this trend since the early 2000s, and it's contributing to their stagnating economic growth. In Germany, migration has helped a little with the aging workforce, but data shows the population will keep shrinking in the future. Even countries with big populations like Brazil and India will, in a few decades, face a shortage of skilled talent.

Belgium, France, the Netherlands, Spain, the UK, and Poland are all looking for ways to keep talent in their 50s and 60s in the labor market, but some countries are more successful than others. To see how your organization could benefit from an age-diverse workforce, read our article here.

6. technology skills gap

According to a recent study, skills shortages continue to prevent organizations from equipping their teams with the skills they need for the digital economy. While the loss of skills and experience through retirement is certainly a contributing factor, the leading cause of the skills shortage is the integration of advanced technology, AI and automation in the workplace. 

While this emerging technology helps to streamline business processes and improve workplace efficiencies, it also requires talent with the skills to operate it.

Globally, 14% of current jobs are at high risk of automation, while 32% will see significant changes in their functions and required skills due to automation, our latest report on Understanding Talent Scarcity shows.

The most exposed jobs are those in scientific, technological, managerial, economic and legal fields. 

These professions won't disappear, though. Studies indicate that where technology is heavily used, there's a positive correlation between AI exposure and employment growth. While some talent may face displacement during a transition period, those who successfully retrain and upskill can adapt to the changing job requirements of the future. However, employers will need to ensure they approach reskilling opportunities in an equitable way that aligns with the needs and interests of affected colleagues. You can read how to bridge the AI anxiety gap here.

which industries are most impacted by the labor shortage?

While nearly every industry is affected in some way by the growing labor shortage, there are a few sectors where the impact is larger:

manufacturing

Even before the pandemic hit, experts were predicting a global labor shortage of over 8 million workers in the manufacturing industry. Today, the labor shortage is more fragmented.

Manufacturing growth has driven job creation in Germany, Italy, Spain, Poland and Japan. But, there have been setbacks in Brazil, which is struggling with output declines, and in America, although the US has been moving closer to recovery as of late 2023 when employment levels rebounded. 

supply chain

Logistics was, as recently as last year, another sector struggling to attract talent before and after the pandemic. But it has since become a leading job creator as a result of strong global demand.  

The global logistics market is projected to grow from just over $4 billion in 2022 to over $12 billion by 2030.

But there are still challenges in individual countries. The UK is struggling with a lack of heavy-goods-vehicle mechanics, Canada is facing a seafarer shortage, and Japan has a dearth of truck drivers, all of which could cause prolonged delays in supply chains.

healthcare

The healthcare industry was hit hard during the pandemic. Not only by going to work every day did these essential workers risk their lives — as well as those of their families — but many also had to work long hours due to staffing shortages. 

Inevitably, that led to healthcare talent leaving the industry. In the US, around 100,000 nurses left their jobs due to burnout, and stress. And over 600,000 registered nurses plan to leave by 2027. The US healthcare industry makes up 1.9 million of the 10.4 million job vacancies as of late 2022, with a vacancy rate of 8.5%. And shortages will be compounded by certain healthcare roles — such as general practitioner physicians — having the highest median age of all professions.

This issue is made more challenging because the number of roles in healthcare is due to expand. People are living for longer and remaining active well into old age, which will drive demand for more skilled healthcare professionals.

What impact does the labor shortage have?

The ongoing labor shortage may not only hinder company growth but also impact society as a whole. For example, supply chain disruptions have already resulted in product shortages. In some areas, the labor shortage may also have resulted in store and restaurant closures or reduced hours.

Rising inflation is another problem that many experts are closely watching, to see whether today’s labor shortage could result in increased wages, higher prices and slower post-pandemic recovery.

The labor shortage, more specifically the skills gap, can also prevent businesses from implementing emerging technology. Nearly two-thirds of global tech leaders surveyed for a poll said candidates don’t have the skills or experience they need, and over half were concerned by a general shortage of candidates. The problem is that these companies cannot implement new technologies without first acquiring the necessary tech-related skills.

The impact of sustained talent shortages poses huge challenges for employers, and reversing the trends will likely take decades.

But there are still opportunities for agile employers to find talent in the meantime. By embracing highly skilled migration and talent hubs for example, those hiring can also unlock new candidate pools with the required skills. 

Even so, it will take a joint effort from policymakers and business leaders to change the direction. We discuss the challenges and potential solutions in depth in our report on understanding talent scarcity.

This is an updated version of an article originally published on 18 May 2022.