What Employers Can Do About Labor Shortages

Many business owners have felt the effects of supply chain complications, rising everyday costs, and a lack of people looking for work. But, why are people not working? Where did the workforce go? Hiring has become one of the biggest challenges for American employers in just about every industry and for every type of worker. One culprit is a dramatically shrinking working age population relative to total population. Those aged 15 to 64 years dropped from 67% of the total population in 2011 to 64.9% in 2021, according to data from the Organization for Economic Cooperation and Development.

Even with a slightly increased U.S. workforce participation rate reported by the Labor Department in 2023, baby boomers are retiring in record numbers and the ranks of younger workers are harder to retain. That’s thanks to the aftereffects of the COVID-19 pandemic and the so-called Great Resignation, when quit rates accelerated due to lack of job satisfaction or inflexible work policies. The result: Not enough new workers are entering the workforce to keep up with demand as baby boomers retire.

Managing this sea change is becoming a top priority for employers. It is especially acute in the manufacturing sector. To help manage supply chain issues, many companies want to reshore operations and move plants and factories back to the U.S., but these efforts may be hampered by a lack of workers available to staff those facilities.

As a result, many employers are embracing new and creative ways to rethink their labor needs and to recruit and retain workers in an increasingly competitive market. Rethinking worker qualifications, embracing technology and automation, and increasing workplace flexibility are all part of the mix.

To better understand how to deal with the shrinking labor force, it’s important to understand the diverse causes of the shortage.

Reasons for the Labor Shortage

One of the biggest contributors to the labor shortage was the increase in baby boomers taking earlier-than-required retirement due to COVID-19 or job dissatisfaction. As the pandemic has waned, many baby boomers found it more attractive to retire on a pension, savings, or increased Social Security benefits. Others discovered that it was harder to reenter the workforce or simply chose not to return to work.

This added up to a sizable drop in the labor force participation rate, the percentage of Americans aged 16 and older who are employed or looking for employment. That figure hit an all-time high of 67.3% in 2000 but has since dwindled to an estimated 62.6% in April 2023, according to the Bureau of Labor Statistics. Keep in mind that a 1 percentage point decrease in the participation rate represents a loss of about 2.7 million workers.

There are other trends fueling the labor shortage aside from an aging workforce. Women are leaving the workforce because of a shortage of available child care. The opioid epidemic has also hit the workforce hard: In May 2018, the Federal Reserve Bank of Cleveland estimated that prescription opioids accounted for 44% of the decrease in men’s labor participation since 2001. With the increase in opioid use and overdoses during the pandemic, that number is likely to rise.

It isn’t just a shortage of workers that’s challenging employers. There is also a severe shortage of skilled workers. In a 2021 survey from the Society for Human Resource Management (SHRM), 60% of organizations said they can’t find applicants with the right skills.

Five Ways to Tackle the Labor Shortage

Both large and medium-sized businesses are finding ways to remain competitive despite a shrinking workforce. Here are five actions that have proved effective:

1. Adjust Qualifications

Some employers are eliminating traditional job requirements such as a four-year college degree, instead evaluating candidates based on the skills necessary to perform certain jobs. "There are a couple of ways the business community can help foster a better labor force," said Jeff Korzenik, Chief Economist of Fifth Third Commercial Bank. "One way is eliminating unnecessary barriers. Over the decades, we’ve tended to create more and more credential requirements for job openings that aren’t necessarily relevant for the job."

The trend is called skills-based hiring, and while it’s particularly common in tech, it’s happening across industries and job descriptions, according to a 2022 Harvard Business Review and Emsi Burning Glass study of more than 51 million job postings. For software quality assurance positions, the study found that only 26% of postings by Accenture, a consulting firm, and 29% of IBM’s job posts required a four-year degree. (Many other tech firms surveyed still required a bachelor’s degree for these positions.)

The U.S. government endorses this approach. In January 2021, the White House issued an executive order limiting the use of educational requirements when filling IT positions.

To find nontraditional candidates, employers are stepping up recruiting efforts at local high schools, trade schools, associate degree colleges, certification programs, and apprenticeship programs to recruit and develop new talent.

2. Increase Workplace Flexibility

Work-life balance is a top priority for many employees and job seekers, especially younger workers. In the wake of the pandemic, employers are recommitting to flexible working hours, child care support, student loan repayment, and other benefits designed to help reduce financial stress and improve the employee’s work-life balance.

Gen Z employees, the youngest in the workforce, have their own vision of what workforce wellness looks like. They expect a safe, healthy, and supportive workplace that prioritizes diversity, community, and mental health support. They look at wellness holistically, expecting all four pillars—physical health, mental health, finances, and social connection—to be addressed.

This generation has no problem passing up offers or quitting jobs in favor of employers that offer more work-life balance and better align with their values. More than half of Gen Z workers globally said they would leave their job if it interfered with their personal lives, according to a 2023 global study of 35,000 workers by Randstad, a human resources service firm.

For employers, it’s vitally important to offer excellent wellness benefits—and make it clear that they do so. Communicating to existing and potential employees your company’s commitment to work-life balance and ESG values can be key to attracting and retaining younger workers.

3. Engage in Skill Building

As job descriptions shift in a fast-changing marketplace, reskill and upskill have become important HR buzzwords. More companies are making a concerted effort to train existing employees, reducing the need for new hires.

Upskilling is the process of improving and updating an employee’s existing skills, such as helping an IT tech gain certification for a new software program. Reskilling, by contrast, involves training an existing employee in a new role. A receptionist whose main duties have been taken over by artificial intelligence, for example, may be retrained for a customer service role.

4. Embrace Automation

Technological developments in artificial intelligence often translate into reduced labor needs in all sectors, as machines increasingly perform a wide range of tasks faster and better than humans.

The labor shortage has spurred employers to further embrace automation for tasks that can increase operational efficiency. Sales forces, for instance, are automating their workflows and quote systems, tasks that usually take managers the better part of a week. Retailers and hospitality firms are relying more on chatbots for customer service. Fast food restaurants use apps and other electronic ordering technology. Fulfillment and distribution centers use artificial intelligence to more efficiently program robots. HR departments in all industries increasingly rely on artificial intelligence to match and screen job candidates more quickly and accurately.

In addition, accounting departments are automating functions to increase efficiency and reduce the amount of resources needed. Fifth Third’s automated payables solution leverages advanced technology to assist businesses’ payment processing and efficiency.

Automating for enhanced efficiency doesn’t necessarily replace workers one for one, but when automation takes over repetitive tasks like data entry, your employees can focus on more rewarding parts of their job, creating a more productive and satisfied workforce.

5. Consider Second-Chance Hiring

Employers are increasingly hiring individuals with a criminal record. This frequently overlooked population can offer employers loyal, talented workers who can help combat the shrinking labor trend. What’s more, 85% of human resource leaders say that individuals with criminal records perform the same as or better than employees without criminal records, according to the SHRM Foundation.

For an example of a successful second-chance hiring program, look at Cincinnati-based Nehemiah Manufacturing. The 13-year-old manufacturer of consumer products aggressively recruits formerly incarcerated employees who now make up 85% of its workforce. The company has an on-staff social worker in its HR department and partners with various local social services to help ensure a smooth transition for formerly incarcerated workers, who may be struggling with financial, housing, parole, skills-building, and other challenges. The result? More than enough applicants to meet the company’s labor needs and a much lower turnover rate than industry averages.

Smart employers are coming up with new solutions every day to combat labor shortages. In this competitive and contracting labor marketplace, employers will need to rethink virtually every aspect of their relationship with what may be their most crucial asset: their employees.