With the current massive layoffs in the Tech industry, very little is being said about the continued labor shortages in almost every other sector. We are all feeling and seeing it – signs everywhere continue to read “we’re hiring”, “help wanted”, or “please excuse us – we are short staffed”. Many organizations are battling the stubbornly low unemployment rate and tight labor market, unable to attract and retain enough workers to properly service their customers. Federal Reserve Chairman Jerome Powell recently gave this challenge a name - a structural labor shortage, which occurs when the demand for workers is higher than the supply of people actively seeking employment. For a variety of reasons, the Fed believes this phenomenon is not likely to reverse course in the near future. So, what should employers be doing?
Many HR solutions currently being recommended to business leaders today can best be described as “divide the pie” strategies. Their objective is to cause an organization to appear more attractive to potential job seekers than its competitors. These can be very effective in the short-term. Examples on divide the pie strategies include:
- Greater flexibility, including hybrid work from home models or a four-day work week
- Increasing salaries and other financial incentives
- Investing in benefits, such as richer health insurance coverage or professional development
- Emphasizing the “why” of the business to respond to a greater desire for purpose-driven work
The challenge with divide the pie strategies is that in the aggregate they do not address the fundamental imbalance between the supply and demand for workers inherent in a structural labor shortage. Instead, they incentivize the already insufficient pool of workers to migrate from one employer to another in search of the best opportunity, ignoring the reality that a structural labor shortage is akin to a zero-sum game. Meaning, if one business does more to attract talent, competitors will likely respond in kind in a vicious cycle until one or the other cannot afford the continued escalation. This is tantamount to a destructive race to the bottom. If this were climate change it would be like trying to clean the air above only yourself. Put another way, it would be like being on a sinking boat but celebrating the fact the hole is not on your side. Is there a better solution?
In addition to trying divide the pie hoping to get a larger slice, employers should consider actions that make the pie larger. These “expand the pie” strategies would serve to directly address the imbalance inherent in a structural labor shortage by altering the relationship between the number of open positions and the number of people seeking employment. Below are four examples of expand the pie strategies employers might consider:
Strategically alter ways of doing business designed to increase revenue per full-time equivalent (FTE).
Simply put, revenue per FTE is the ratio of the revenues of a business (the numerator) divided by the number of people the business employs (the denominator) to produce that revenue. In a zero-sum environment where there are too few prospective employees chasing too many jobs, a logical solution for any organization would be to reimagine a business model which can drive a higher level of revenue with the same or fewer employees. This does not necessarily mean layoffs or simply replacing humans with robots, but it does mean making strategic choices that will allow the business to increase the revenue it can produce with a given number of employees. Navigating uncertainty and changes in business needs require diligence and sometimes difficult decision making. If done properly, this will generate the opportunity for organizations to reinvest the additional revenues in the business (including the compensation of existing employees), not just increase returns to shareholders, thereby creating a win, win, win for the business, employees, and shareholders.
Partner with colleges and universities to match skills with needs.
Businesses increasingly need employees with specific skills. It may be possible to partner with local colleges and universities to introduce targeted curricula and to conduct research projects designed to produce graduates with the enhanced capabilities necessary to meet the needs of those businesses. One such example is Fortune 500 company, NCR, which relocated from Dayton, OH to Atlanta, GA in 2009. One of the primary motivations for the move was access to a better labor market to drive growth and innovation. Since then, NCR has built a strong partnership with Georgia Tech University. NCR has become one of the largest employers of GT students, hiring 270 students alone in 2022 and relocating its corporate headquarters within a quarter mile of campus.
Personalize performance management.
Performance management is often thought of as a necessary compliance exercise to manage compensation and promotions. In this context, think of it more like the feedback and coaching provided to elite athletes to achieve peak performance and build a winning team. For example: Bain, McKinsey, and BCG (all "best places to work") have weekly feedback, end-of-project coaching, and formal mentorship programs for each employee. Done properly, these can significantly improve individual performance while at the same time increasing organizational effectiveness and morale. The idea is, don't rely on periodic performance reviews - engage in constant coaching which drives higher performance and increased retention. In an environment of scarce talent, it would be a competitive advantage to be recognized as an employer of choice - a winning organization that does more to develop the talent and therefore personal value of every employee. Increasing the effectiveness and productivity of an organization’s workforce will positively impact revenue per FTE.
Directly address the structural labor shortage through thoughtful immigration.
In the current talent environment, there is a clear need for a supply of skilled workers in the United States beyond our capability to grow and train them. This has been the case off and on over much of the country’s history, driven by continued manufacturing and technological innovation. Setting aside the politics of immigration, the business problem - and opportunity – is creating opportunities for workers who possess the specific skills businesses need to be allowed to enter the country under temporary work visas. It may later be possible for some of these workers to remain as permanent residents or naturalized citizens. In certain industries and for particularly scarce skill sets, initiatives for sponsoring immigration have historically been a reliable source of knowledge, skills, and creativity necessary to fuel our continued growth. Today, the value of strategic immigration may be amplified by the current structural labor shortage.
So, why are the “divide the pie” strategies currently receiving more attention? Dividing the pie is generally simpler and quicker to implement. These potential actions require far less knowledge of change as they are more about managing what is known. In sharp contrast, the “expand the pie” strategies are about taking advantage of new opportunities, involve more substantive change, and will require a much stronger acumen to lead through (vs manage) that change. By definition, expand the pie strategies directly address the supply and demand imbalance inherent to a structural labor shortage and are therefore more likely to achieve more significant and sustainable progress. To execute these ideas will require a much deeper understanding of the science of change and how to navigate it effectively. Do not shy away from this challenge – your competitors may not.
Rick Western is the Chief Executive Officer of Kotter Inc.
