Correcting the Talent Supply and Demand Equation in the United States
Allegis Group,  July 13, 2017

Correcting the Talent Supply and Demand Equation in the United States

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Correcting the Talent Supply and Demand Equation in the United States

Editor’s Note: The following is an excerpt from Allegis Group’s “Global Workforce Trends Report,” which is available for free download.

Companies in the U.S. face an intriguing contradiction in market forces. Namely, the economy is large, the value generated by U.S. workers is high, and the demand for many skills is outstripping supply. At the same time, while wages have grown at a steady pace over the last several years, a number of factors have prevented them from growing quickly enough to keep up with a tightening supply and demand situation.

A confluence of factors is contributing to the wage situation, but a closer look at the numbers shows that the supply shortage is not going away, and rises in the cost of labor may accelerate in the coming years. Business leadership, talent, and procurement decision makers need to take note: the way companies define and value workers is changing rapidly, and talent planners must stay ahead of the curve.

Macroeconomic Trends: Economic Growth and a Lower Working-Age Population

The evolution of the U.S. workforce is driven in large part by changes in the general population. A recent Pew Research Report notes that without immigrant workers, the population of working-age U.S. adults will shrink by 2035, and in 2016, Millennials (nearly 80 million, aged 18-35) surpassed Baby Boomers (approximately 74 million, aged 52-70) as the largest living generation in the U.S.

This shift toward a younger, shrinking working age population means companies have to approach talent scarcity as a normal part of business. The overall economy, however, is strong, as the U.S. remains the premiere global economic force, contributing more than 15 percent of all global GDP. China, with more than three times as many employed workers as the U.S., generates 40 percent less total GDP. Inherently, the value of workers in the U.S. is very strong with over 70 percent in the services industry, one of the highest marks for all countries.

According to an analysis of data from the U.S. Bureau of Labor Statistics (BLS), the combination of strong business pressure and limited worker supply has led to a measurable tightening in U.S. labor markets. As seen below, the availability of workers at all levels of education, based on unemployment rates, has shrunk by half since 2011, when the economy began rebounding from the 2009 recession.

Considering the tightening of the U.S. workforce as shown by data from the U.S. Bureau of Labor Statistics, it’s no surprise that companies are feeling the effects of talent scarcity across industries.
Considering the tightening of the U.S. workforce as shown by data from the U.S. Bureau of Labor Statistics, it’s no surprise that companies are feeling the effects of talent scarcity across industries.

Industry and Markets: Talent Scarcity Begins to Impact the Marketplace

The workforce supply and wage situation in the U.S. has already led to talent shortages. The U.S. economy has been an effective job creator since the recession, and hiring has been strong in 2017. Although the pace is likely not sustainable, the sheer volume of job gains seven years into the recovery is commendable.

According to Job Openings and Labor Turnover Survey (JOLTS) figures from the BLS, not only is hiring strong, but job vacancies are also at record levels. Worker demand will continue to represent economic strength, but those same lingering vacancies may soon turn into a liability.
According to Job Openings and Labor Turnover Survey (JOLTS) figures from the BLS, not only is hiring strong, but job vacancies are also at record levels. Worker demand will continue to represent economic strength, but those same lingering vacancies may soon turn into a liability.

According to recent findings from a JOLT survey by the BLS, job openings remain at or near record highs in the U.S.
According to recent findings from a JOLT survey by the BLS, job openings remain at or near record highs in the U.S.

Much of the job growth in the U.S. comes from lower-skilled industries such as restaurants (up 254,000 YoY) and construction (up 177,000 YoY), but there are also significant increases in the most lucrative sectors. Healthcare added nearly a half a million jobs in 2016. A TEKsystems Healthcare IT survey found that 50 percent of managers planned to increase contingent IT hiring, and 67 percent planned to increase full-time hiring. Likewise, finance, insurance, and investment banking (up 112,000 YoY) are finally seeing a turnaround after years of declines. On the down side, several segments have struggled, namely durable goods manufacturing, especially machinery and semiconductors, which are heavily affected by canceled oil and gas drilling projects and a sharp decline in Chinese exports. Other segments have not grown at the pace many expected.

Even considering the slower growth in some sectors, the overall U.S. economy still struggles with worker scarcity. With the number of available workers at half of their 2011 levels and falling, industry struggles are creating news:

  • “The worker shortage facing America’s farmers” – CNN Money (Sept. 2016)
  • “What’s Holding Back the Housing Market? Not Enough Construction Workers” – Reuters (Sept. 2016)
  • “Oil companies face worker shortages after 350,000 layoffs” – USA Today (June 2016)
  • “Is 2017 the Tipping Point for the Manufacturing Skilled Labor Shortage?” – Detroit Business Journal (Jan. 2017)

The scarcity of skilled workers will continue to be a driving force in the U.S. economy, and the impact of that scarcity has already begun to reshape the world of business and talent.

Business and Talent: The Relationship Between Companies and Workers is Changing Rapidly

As the U.S. economy grows, the shortage of workers is being felt across industries. In fact, while productivity in terms of per capita GDP is strong, overall GDP growth is sluggish, and the struggle for growth is likely due to the labor supply issue. Consider the imbalance of talent across industries as represented in BLS unemployment data.

The worker shortage points to a more serious issue that may impact the future of jobs in the U.S. Namely, by traditional measures, wage growth has not responded to supply limitations; instead, wages rose immediately after the 2009 housing crisis and then settled into a period of steady but modest growth that continues today.

Many factors have kept wage growth in its range over the last several years, but three of the most influential drivers are also becoming an integral part of the talent conversation among companies across industries. Those drivers include the rise of the procurement mindset, the use of overseas workers, and a growing pool of freelancer and SoW labor whose rising wages may not be fully captured in the statistics. Each of these phenomena offers lessons for talent planners.

The Influence of Procurement, Flexible Workers, and Solutions Providers on Wages

Following the 2009 recession, companies hesitated to add full-time employees. As a result, organizations relied more heavily on contingent workers. While employee hiring has traditionally fallen under the HR umbrella, managing the suppliers of contingent workers fell increasingly into a procurement area of responsibility, and procurement’s traditional focus has always been to drive down costs.

As a part of the procurement and contingent worker driven strategy, companies also increasingly engaged MSP solutions. Traditionally, MSPs focused on improving efficiency and driving down costs associated with managing the flexible workforce supply chain. Today, the U.S. contributes more money to the staffing industry than the next three countries combined (Japan, the U.K., and Germany).

Based on historical data and the BLS: Current Population Survey. Table A-30. Bolded occupations typically require college degrees or are considered STEM skill sets. Numbers in red represent critically low levels or severe tightening to labor pools.
Based on historical data and the BLS: Current Population Survey. Table A-30. Bolded occupations typically require college degrees or are considered STEM skill sets. Numbers in red represent critically low levels or severe tightening to labor pools.

U.S. wage growth has remained steady since 2010, while the supply shortage has increased substantially.
U.S. wage growth has remained steady since 2010, while the supply shortage has increased substantially.

As part of the solutions approach, many large companies now manage contingent staffing suppliers through Vendor Management Systems (VMS) run by MSPs tasked with driving further efficiencies. According to Staffing Industry Analysts (SIA), North America represents 60 percent of all revenue passing through MSP/VMS systems, and the U.S. market is nearly four times larger than the next largest market (the U.K.). Growth in MSP/VMS usage in North America greatly exceeds actual staffing revenue growth, and it is now estimated that 66 percent of all staffing revenue worldwide is coming through an MSP/VMS. A disproportionate amount of those placements occur in IT, a profitable sector of contingent staffing but also one with high average wages due to skills shortages.

Looking ahead, the influence of procurement will likely evolve as organizations face decreasing talent supplies. Attracting and retaining workers, along with ensuring talent quality, are becoming larger priorities for traditional employees and flexible workers alike. In other words, the need for cost control and efficiency is no longer the only focus; it is one of many parts of an effective procurement and contingent workforce strategy, and so the other factors, talent quality and retention, may compel planners to increase wages more quickly in the future.

The Use of Outsourced Labor and Its Influence on U.S. Workers

Hand in hand with the rise of procurement-driven strategy, the usage of largely Indian-based IT and engineering services firms has also influenced wage growth. From 1995 to 2001, U.S. contingent IT staffing grew at a rate of 22 percent per year. Since 2004, IT staffing has grown by five percent per year, from $16B to $29B, while Indian services firms such as TCS and Cognizant grew at 21 percent annually to nearly $50B. In other words, IT staffing growth over the past decade in India mirrors that of the U.S. in the 1990s. At the same time, the salaries of seasoned IT workers in India are typically a quarter or less of their U.S. equivalent.

Currently, companies are not yet changing their views on India as a solution to their talent needs. A report by the Society for Human Resource Management (SHRM) notes that 55 percent of surveyed employers plan to hire foreign talent in 2017, and 63 percent cited foreign national employees as important to their companies’ talent acquisition strategy.

For procurement and HR planners, an endless supply of inexpensive overseas talent to fill in the gaps is not a foregone conclusion. India has its own talent shortage.

The supply is in flux across other countries, and companies may begin to see wages rise. In fact, this uptick in worker costs is already happening, but it is doing so under a new label, leading to a third trend influencing labor costs: the rise of the freelancer.

Freelancer Influence: Independent Workers Providing Cover for Real Wage Increases

Beyond traditional employee hiring and contingent worker engagement, hiring managers and staffing companies often take other routes to secure talent. The two most used paths are through the use of SoW resources and independent contractors (ICs). Neither of these worker types is new, but their usage in the staffing space has only recently exploded.

It is difficult to estimate the size of SoW and IC usage in staffing. In 2013, SIA estimated that the largest sector for SoW in contingent staffing, IT, was only $2.7B in revenues, with SoW at no more than 10% of sector revenues overall. Another 2015 report found that 51% of respondents incorporate SOW into their CW program with an additional 39% planning to do so in the next two years. While many contingent firms may not yet emphasize or publicize their growth in this area, the engagement of SoW and IC talent does represent a significant part of the workforce, and many services and solutions providers are creating paths to bring these freelancers or “gig workers” under management through advanced MSP or total talent solutions.

Regardless of how companies engage IC and SoW talent, freelancers represent a category that may be falling out of view of those who track workforce spend. When workers become contractors, their job titles and duties may change.

Many developers or business analysts are now called consultants or subject matter experts, allowing their bill rates to increase significantly. While wage increases have been muted within occupations, workers can land raises by upgrading their occupational titles. Likewise, on the employer side, managers may find themselves using SoW or IC workers as a way to engage talent under higher rates while avoiding the watchful eyes of their procurement teams.

Moving forward, SoW workers will probably rise in numbers as companies deal with worker shortages. They will have new job titles, and companies will classify the spend under different departments. In short, companies will do whatever is necessary to get work done and find good workers, but the actual cost of talent will continue to rise.

Looking Ahead: The Future for Talent Planners in the U.S.

The U.S. workforce situation is representative of the same issues talent and business planners face around the world. There is a collision course between talent scarcity and wages. Many organizations are addressing the shortage by depending on overseas talent, or they are paying dearly for people who can do the work and then hiding the spend under SoW or IC categories.

Moving forward, efficiency and cost-control will remain priorities for procurement in its approach to the workforce, but additional priorities are now also part of the picture, as companies improve their ability to compete in an increasingly tight labor market. Strategic planning, flexible thinking, developing workers from within, candidate and worker experience, and employer brand are all likely to be part of the language for procurement, just as they are for HR and talent acquisition today. It’s a slow path of evolution, but the companies that embrace change are likely to improve.

Allegis Group Global Workforce Trends Report 2017
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