Asking a labor expert for an outlook on the U.S. workforce is akin to asking a weather forecaster who’s issued multiple storm warnings how the weather is. “Haven’t you been paying attention?” the forecaster — or economist — might ask.
Case in point: Lightcast, which specializes in labor market analytics, entitled its first report in a series on the U.S. labor shortage “The Demographic Drought: The Approaching Labor Shortage.”
The organization followed up that 2021 report with one in 2022 entitled “Bridging the Gap in our Labor Force.” In September 2024, a new report entitled “The Approaching Storm” will debut.
Translation: there is a labor shortage on the horizon. It’s only going to get worse. We really mean it.
“We knew this was coming,” said Lesley Delgado, president of Strategic Recruiting Services in New Hudson, Mich., who noted that three people retire to every person entering the labor force. “We see an aging workforce without a bench to replace these people.” In fact, she noted, 2024 was predicted to be the biggest year of change, with baby boomers exiting the workforce.
This demographic trend is set to continue. Lightcast’s 2022 report noted that, by 2030, all baby boomers will be 65 or older, and by 2034, older adults will outnumber children for the first time in U.S. history.
Our country’s declining birth rate doesn’t help. U.S. births sat at just under 3.6 million in 2023, which is the lowest annual number since 1979.
While numbers have fluctuated, the labor trends Lightcast reported on in 2022 still exist. There were 8.2 million job openings as of June 2024, according to the U.S. Bureau of Labor Statistics. That’s down from the 11 million Lightcast reported in its 2022 report, but it’s still significant when compared to pre-pandemic levels (6 million in December 2019).
Conversely, the U.S. has only 6.8 million unemployed workers (defined as those not employed but seeking jobs), leaving us with a shortfall of more than a million workers.
Borrowing from other populations to bridge the gap is nothing new. Immigrants have traditionally played a big part in the American population and workforce. But the number of migrants entering the United States fluctuates. After a period of declining immigration, the United States added 912,000 foreign-born residents between 2021 and 2022.
More recently, the October 2023 U.S. Current Population Survey showed 15% of the American population was foreign-born, higher than any other census has recorded. The same month showed a record high of foreign-born residents, at 49.5 million. However, those numbers will likely wane again, as public opinion on immigration is changing.
But it’s not just population numbers that matter. The labor force participation rate, or the number of people working or looking for work as a percentage of the civilian population greater than 16 years old, gives us a picture of how many people who could work are working. In June 2024, the labor force participation rate was 62.7%, a very slight uptick from the 62.1% reported in February 2022.
Factors affecting labor force participation
Many factors have contributed to low labor force participation, including the pandemic, an increase in personal savings and wealth, and the shortage and cost of child daycare.
First off, the pandemic caused a shift in work conditions and work philosophy, and many people who left the workforce to care for children or aging parents, or because they couldn’t risk exposure, have not returned.
The second factor is related. Lightcast’s 2022 report spells out the issue: “One question we need to consider is whether some of the missing prime-age workers are people who learned how to live on one income during the pandemic.”
The report points to the personal savings rate (the ratio of personal savings to disposable personal income), which spiked to 32 in April 2020. That rate has since come down and sits at 3.4 as of June 2024, which could work in the country’s favor to increase labor force participation.
Wealth, too, has increased in our society. “The current working generation is the wealthiest in the history of mankind, and their kids will be too,” noted Beth Kelly, president of HR Collaborative, based in Grand Rapids, Mich.
Ron Hetrick, senior economist for Lightcast and co-author of the “Demographic Drought” series, said this household wealth is often the reason people aged 16 to 19 are missing from the labor force. Their parents can afford to support them and tell them to concentrate on school instead of working and/or they are too busy with sports and other extracurricular activities.
Daycare shortages and increasing costs also play a role in labor force participation. Workers are more difficult to come by, which in turn drives costs up. According to Childcare Aware of America, the national average annual cost for childcare in 2023 was $11,582, up from $9,687 in 2019. Consequently, it’s often difficult to justify working instead of doing the caregiving yourself, so many workers opt out of the labor force.
Industry outlook
While the labor crunch is being felt across the board, some industries have been hit harder by the “approaching storm,” said Hetrick, who noted that, in 2021 and 2022, our country was in the outer bands of the labor shortage “storm,” but that it’s coming ashore in the next four to six years.
Certain industries, like finance and information technology, have not been affected by the storm, but others, like health care, are feeling the effects. Food service, construction trades, mechanics, firefighters, police and the military have very low participation rates, Hetrick said, because too many people are following the traditional path of getting a four-year degree when the jobs that need to be filled don’t require them. And artificial intelligence can’t fill these jobs, either.
“For three decades, people have been told they need a college degree to succeed,” he said, noting that college educated people are often well-paid, but many trade jobs pay well without accruing college costs and loans. “Everything you were ever told is flipped upside down,” he said.
Changing mindsets and practices
With changing demographics and low labor participation rates come changes in business practices. At least, one hopes. Delgado, whose business is recruiting, said that, while it’s taking a lot longer to fill positions, companies that have evolved the way they recruit and do business are able to find the people they need.
“My customers who live by their core values are not having trouble recruiting,” she said. “It is the companies stuck in thinking that does not benefit them that have trouble.”
For example, setting rigid requirements for open positions doesn’t work anymore. “Hiring for attitude and buy-in to your core values is more important than skillset,” Delgado said. “We can teach people technical skills.”
Hetrick agreed. “Our society was built on on-the-job training, but we’ve gotten away from that. We expect that people will come to us ‘fully baked.’ That thinking is going to have to die,” he said.
Hetrick advised hiring employees for their willingness and ability to learn new skills and cross-training employees to fill new positions as company needs change. He pointed to the 2008 subprime mortgage crisis as an example. As the housing market grew, so did the number of mortgage loan processors, but in the market downturn, many of those same people became loss mitigation experts.
Many industries are going to have to rethink how they do business, said Hetrick. For example, health care providers should rethink emergency rooms, which many people use for non-emergency issues, causing overcrowding. He also suggested finding ways to offload responsibilities placed on overworked nurses.
Delgado prized being in touch with workers as one key to effective retention and recruitment. “You don’t decide to replace your plant manager the day they’re retiring,” she said. She mentioned how one of her customers hired a replacement for a retiring employee one year in advance, and then kept the seasoned employee working two days per week to train the new one.
Other progressive hiring practices include offering part-time positions for working mothers, considering contractual arrangements (like the fractional human resources services provided by HR Collaborative) and offering onsite daycare options.
An ‘extreme’ recruiting example
Menlo Innovations, a custom software company based in Ann Arbor, Mich., conducts what it calls “extreme interviews” that minimize hiring risks and also mine for employees who fit the company’s unique culture.
Rich Sheridan, the CEO who also holds the unique title of “chief storyteller” for Menlo, explained that between 2,000 and 3,000 people travel from all over the country to see how Menlo works and recruits. And Sheridan is the storyteller and “tour guide” who showcases the company’s best practices.
The first thing you might notice is that Menlo, in contrast to most information technology companies, is noisy. People are talking and collaborating. Because they have to. They all work in pairs, sharing a computer and switching partners every five days.
It’s all part of what Sheridan calls an “intentionally joyful culture” (a concept on which he’s written a book). Menlo’s is also a culture Sheridan admits is not for everyone. “We are not the place for everyone,” he said. “We’re not trying to be all things to all people.”
That’s why the “extreme interview” process — Menlo’s moniker — involves pairs of candidates working to solve a real company issue who are asked to aim to get their partners a second interview. The pairs are observed, and those who collaborate and problem-solve well — and are not scared away by the environment — are invited for a second round of interviewing.
The second round is a paid day of working with a partner on a Menlo project. Yes, it’s paid, as a way of honoring candidates’ time. If the arrangement still works for the candidate and for Menlo, there’s a paid three-week trial before a candidate becomes a bona fide employee.
The process bucks up against Sheridan’s earlier management career, in which hiring involved “two people lying to each other,” he said. Back then, Sheridan saw managing as a race to make people productive before they became disengaged, he said. “It was a two-month race that I often lost.”
Menlo’s process serves multiple purposes. It minimizes the risk for candidates and for Menlo, as candidates are immersed in the environment and given a realistic taste of what it’s like to work there, and Menlo also gets a chance to evaluate them. It’s also a head start on the onboarding process, because candidates learn as they’re interviewing.
Sheridan does not expect that every company will recruit and work the way Menlo does, but businesses can take lessons from the innovative software firm. First, be intentional about your company culture, and align your human resources practices with that culture. Second, stop expecting a resume to tell all you need to know about a candidate, and find ways to evaluate willingness to learn, problem-solving skills and other traits that have nothing to do with degrees or certifications.
Finally — even though you may not go to the extreme Menlo does — do your best to honestly show your candidate your culture, Sheridan said. “Give your candidate a chance to see what it’s really like to work here,” he said.
The silver lining
Even as Lightcast reports on the “approaching storm,” there are silver linings to the labor shortage, said Jeff Korzenik, chief economist for Fifth Third Commercial Bank.
“For the first time, the business community has to worry about bringing marginalized workers in,” he said. That means reaching out to minorities, women, older workers and — a topic he’s studied extensively and written about — second-chance hiring, or hiring those formerly convicted of a crime. Creating pathways to jobs for those people is ultimately healthy for society, he said.
Korzenik also noted that, while overall labor force participation has stayed relatively flat, the participation rate for those aged 25-54 is the highest it’s been since April 2001, at 84% as of June 2024. Comparatively, it was 79.8% in April 2020.
“We’re very close to all-time highs,” said Korzenik. “We’re making huge progress. In part, it’s because employers are changing their practices.”
“Businesses are good problem-solvers,” and they will find solutions, Korzenik said.
Going forward, Korzenik said it’s important to educate business leaders about best practices like skills-based hiring and different paths to education, including community colleges, trade schools and apprenticeships.
“Jobs are going to change over time,” he said. “What we want are lifelong learners.”
