What do growing companies need from their local labour markets? First, they need a pool of talent which is in surplus to the jobs available (full employment economies are nightmares for employers) and secondly they need workers with the right skills.
The size of the labour pool and the level of available skills are critical for both competition and growth. This article compares the workforce challenges facing business in Europe with those facing business in China and notes that they have a lot in common. It suggests how multi-national companies should respond.
Why might the labour pool shrink over the next 10/15 years? Because the population of Europe is aging. Through a combination of lower birth rates and longer life expectancy (and without net immigration) the median European age will rise from 35.4 in 1991 to 41.2 in 2011 to 47.6 in 2060 (Eurostat). In 1998, 21% of Europeans were over 64 years old. In 2050 47% will be. Net immigration would of course help replace the missing workforce but is politically difficult, as can be seen with the recent debates in the UK and around Europe.
On the other hand, with nearly 25% of Europe’s youth currently unemployed, the age related shortage in the workforce has yet to show up. This is partly lack of jobs but in a report just published, McKinsey & Co said that some 27% of European businesses reported leaving a vacancy open last year because they could not find anyone with the right skills for the job. SMEs tended to suffer more from this than larger employers. The report went on to state that 33% of businesses surveyed across the whole region found that skills shortages had caused major damage to their business in the last year (in Greece it was 45% and Italy 47%).
Do employers in Europe face the double whammy of a shrinking workforce and a major shortage of the right skills? If so, this is likely to have a significant impact on European growth prospects for many years to come.
What can be done?
Well, in terms of the workforce gaps left by an aging population there are 3 options : (1) invest in machines to do the work instead of people; (2) bring in extra people through net immigration, or (3) some of both. Businesses can only directly control option 1. While this involves significant long term capital outlay and increased risk, it will be essential if companies are to remain competitive and growing. Investment is still lagging significantly across the whole of Europe.
Dealing with the dangerous skills shortages should in theory be less risky. McKinsey’s report reveals there is a disconnect between what training establishments think they have achieved in terms of preparing graduates for work and what employers actually see. The report states that 74% of training providers thought their graduates were well prepared for work while only 35% of employers agreed.
The McKinsey report mentions a number of measures to address the skills shortage problem. The main action for businesses is to work more closely with the training providers to design courses that fit their business needs and maybe even participate in the teaching itself. Wherever possible businesses should support the training with work placements and opportunities for practical learning. Clearly this is harder for SMEs but great things can be achieved by SMEs working together, perhaps through local Chambers of Commerce or industry associations.
China also has a demographic and a skills problem, although on a rather different scale.
As is well known, China is aging too. Three decades ago 5% of the population was over 65. Today its 9% (125 million people). In 2050 it is predicted to be 25% (330 million people). The one child policy is often held to blame and is clearly a major factor but, as we can see from Europe, other deeper factors must be at play as well.
Given that China produces 9-10 million graduates each year and close to a million post-graduates, what might come as more of a surprise is China’s skill shortage and the fact that it too is predicted to get worse. In part again this is because China’s training providers have been slow to adjust to the needs of business. Currently about 20-30% of graduates fail to get a job on graduation because they lack the right skills and often have to settle for lower skilled jobs. However, the gap between the demand for and the supply of people with the right skills is predicted to widen over the next decade with a shortfall, on some estimates, of as much as 16% of demand.
Therefore, for multi-national companies in China the competition for talent will intensify. While before the recession such companies tended to have a competitive advantage in the Chinese labour market, evidence suggests this is being eroded fast as Chinese companies themselves grow stronger and more international. International companies operating in China will need a compelling talent recruitment strategy which, as in Europe, should include working with training providers to ensure that graduates arrive with the skills that business needs.