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Labor Power

The persistent global labor shortage suggests that the global economic system is out of whack. At the aggregate level, the labor force wishes to obtain products and services that it is not willing or able to produce itself, despite a century of accelerating investments in capital goods and technology.

According to the Manpower group’s ‘Global Talent Shortage’ survey (2024), 70% of employers or more have been having trouble finding the right candidates for open positions since 2021. This compares to a figure in the 30s for most of the years following the Great Financial Crisis and 40% in the heat of 2007.

The reasons for this evolution are well-documented and include demographics (e.g., Japan, Germany), a mismatch between demand and supply (e.g., US reshoring, structural unemployment in France), and the Great Resignation observed since COVID (see The Silence of the Employeesin 2023.)

Consequently, labor is getting more expensive, calling for various measures. As a first line of defense, firms can redesign manufacturing processes and jobs to achieve productivity gains through automation and new artificial intelligence tools.

Employers may also seek to broaden the pool of suitable candidates such as ‘STARS’ (‘Skilled-Through-Alternative-Routes vs. diplomas) through investments in training, or young parents through the provision of childcare. An enticing corporate purpose may further support this supply-side strategy.

Higher wages promoted by unions will naturally be part of the solution, including, for example, through a 4-day work week for the same pay (check this UK experiment) or in the form of perks, with Gartner highlighting climate change protection as an offering in vogue in the US.

Finally, investing in mid-level management, an often underappreciated corporate resource, will help hire, develop, and retain the right talent across a firm.

Notwithstanding these measures, the labor market developments threaten the sustainable performance of many companies, with implications for their strategy, operational risk, and financial profile. In that context, investors (outside certain US States) and M&A practitioners will find valuable information in firms’ newly required disclosure (check ESRS standard S1 incl. ‘Training and skills development metrics.’)

In my experience, labor scarcity also comes with an insidious trap that significantly impacts performance and which may not be captured by non-financial data: Holding on to underperforming employees out of fear of not being able to replace them without appreciating the damage done to morale and productivity.

Taking a step back, government policies around most of the world have evidently failed to provide adequate labor supply (quantum, suitability). Market forces are now compelling firms to step in to fix the situation and assume some government functions, including education and social services.

This is arguably good news. First, the private sector will be more efficient than the government at supporting employees. Second, the world has a chance to move away from an economically dubious system in which governments must subsidize workers who are not sufficiently compensated by corporates to make a living.

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