The Labor-Shortage Myth

When boomers start to retire, the theory goes, we'll see a job boom. Too bad it won't happen.

Want to feel extra cheerful about your career prospects? Take a look at recent pronouncements from the U.S. Census Bureau, the General Accounting Office, the National Bureau of Economic Research, and the Conference Board, all duly reported by a host of newspapers and magazines. "The Coming Job Boom," proclaims Business 2.0. Yep, there's a labor shortage coming!

That would be a big deal. Workers, especially skilled workers, could expect higher wages and better perks. Employers would have to recast their hiring and retention strategies -- and indeed, many are already doing so. The ramifications for economic policy and investing would be profound.

Just one problem: It's not happening -- and it's not likely to happen. Rather, it's an overblown theory, fed by questionable assumptions, that has gained credibility through sheer repetition.

Here's the Cliff Notes version of the labor-shortage argument: The workforce is aging. By 2015, nearly one-fifth of workers will be over age 55. Around then, huge throngs of baby boomers will begin retiring to Florida (or wherever), leaving the much smaller "baby bust" generation unable to fill all those jobs. The past three months of strong job and wage growth in the United States, proponents would say, is a preview of things to come.

"The year 2011, when boomers begin to retire, will be when we'll start to notice the tightness in the labor markets, and that's likely to become a pretty perpetual condition from here on out," says Justin Heet, a research fellow at the conservative Hudson Institute, a contributing author of the book Workforce 2020, and author of the follow-up report, "Beyond Workforce 2020." By the year 2030, avers a GAO report entitled "Older Workers," "the United States could experience a labor shortage of 35 million workers." Says David T. Ellwood, a respected Harvard professor of government: "CEOs, labor leaders, community leaders, all came to the unanimous conclusion that we will have a worker gap that is a very serious one."

But that argument rests on several logical flaws. First, folks are working longer. The typical retirement age in the United States today is 62, not 55, says Brigitte Madrian, a professor of financial gerontology at the University of Pennsylvania's Wharton School. After declining for decades, the labor-force participation rate for Americans aged 65 to 69 jumped to 26.1% in 2002 from 21.9% in 1994, according to the Bureau of Labor Statistics, with a comparable increase for folks 70 to 74. The AARP reports that half of its 35 million members (50 and over) are still working today. More telling, it says that more than 80% of baby boomers it surveyed plan to work well into their seventies.

Boomers, who have always identified themselves more with work and career than did previous generations, are likely to explore alternatives to traditional retirement, such as second careers or cutting back on hours rather than giving up work completely. In a very practical sense, they have to: Their life expectancies have climbed past 77 at the same time that health-care costs have skyrocketed and savings rates have plummeted.

Besides that, the labor-shortage alarmists underestimate the capability of younger generations. Peter Cappelli, another Wharton professor and director of the school's Center for Human Resources, notes that even though boomers outnumber busters overall, "the cohort of college grads didn't shrink. We've just pulled more kids up into the system," he says. Some 930,000 bachelor's degrees a year were conferred at the height of the boomers' run through college -- while the smallest graduating class for busters produced 1.16 million grads. Now college-educated members of the "Echo Boom," a group close in size to the boomers themselves, are starting to enter the workforce. No evidence there of a shrinking skilled labor pool.

Cappelli concedes that by 2014, "we're looking at slower growth in the labor force than we're used to." But that's a phenomenon the economy has adjusted to before. The United States' gross domestic product, he observes, is six times larger than it was at the end of World War II, yet the labor force is only twice as large. That's about productivity, folks. And this time, the inevitable increase in offshoring will curb job growth even more dramatically. "Low-cost knowledge workers may well do to Wall Street what low-cost manufacturing workers did to Main Street," says Richard D'Aveni, a professor at Dartmouth's Tuck School of Business.

But the coming labor shortage? The job boom? They're myths, kept alive mostly because they allow employers easy solutions. "A lot of companies got whacked around in the 1990s when the economy heated up and the labor market tightened. They learned it's easier to lobby for more Indian engineers on H-1B visas than to address their own retention policies and training programs," Cappelli says.

The real solution, of course, is more difficult. It requires companies to invest in the right technologies and in their own employees in order to stay ever more productive. It's not as sexy as a demographic crutch. It just happens to be the right answer.


Discussion Guide

Interested in further exploring some of the ideas and issues in this article? Consider starting a Fast Company reading group. Here are some possible conversation catalysts:

Alison Overholt addresses the notion that an aging population will swing working conditions in favor of younger workers in the upcoming years. Picture the age demographics at your company in 10 years. Do you envision any labor shortage due to an aging workforce? What steps can you take to prepare for it now? With retiring age being pushed off and Social Security at risk, will labor conditions turn pro-worker at any point in the future?

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2 Comments

  • Noel Snow

    Dear Ms. Holt - Two words: Macroeconomics 101. Leading economists Edward Yardeni, Harry Dent and Noble Prize winner Michael Porter also theorize acute labor shortages in the coming years; government and historical data/statistics bear this out as well. There are two major variables:  as Baby Boomers retire, Generation-X or "the Baby Bust" (born post-1964) is a group half their size. Birth rates dropped even more dramatically post-1980. Our current labor force, one within their prime working age [25-54], is even smaller. The other variable is projected job growth, noted by reviewing historical rates of economic growth (expressed as GDP). Real GDP in the US has grown at a rate of 3-3.5% since the end of WWII (Dept of Labor), and labor productivity & growth are at a rate of just under 2%. The result: shortage. The shortage includes both skilled and unskilled labor with skilled labor being more severe. It seems to be fashionable lately to dismiss the labor shortage as myth. However, hard data bears evidence to a shortage reality, and I certainly think being prepared (educationally and otherwise) is better than not.

  • Dying to work full time

     With automation replacing the more routine jobs in the foreseeable future, there will be a labor surplus. Cars that drive themselves, delivery trucks making rounds without drivers, as well as Semi haulers going driverless cross-country. Next will be trains. There's a demotivational poster that talks about robot repairmen being phased out because the repairmen are being replaced with repair robots and software. Even at some fast food stores, one inputs an order at a kiosk and then his number is called to pick up his tray. I can remember elevator operators. I will also be able to say that I can remember when people drove their cars. If you can, start to realize that we will eventually face 50 percent unemployment if we can't figure out how to grow jobs.