This article is the first in a three-part series on the global macro trends that will likely dominate the business environment over the coming decade. Each part of the series will examine the most significant and interrelated challenges facing businesses recovering from the pandemic: Demographic decline, global supply chain restructuring, climate change, and sovereign debt crisis.
There is no going back to pre-pandemic times. There is only going forward to a post-pandemic future. Since the Mid-1980s, the business operating environment has been relatively stable and predictable. We are now facing an age of disruption caused by the pandemic, climate change, an aging population, and how governments choose to respond to these crises.
The last several decades were relatively stable due to globalization and massive increases in the global working-age population. This kept interest rates low and inflation in check. That business environment drove the cost of capital to historic lows, allowing companies to lever up, minimize working capital requirements, and create global supply lines.
Today globalization is waning as the working-age population shrinks among major industrial nations. The pandemic accelerated that departure from the workforce by disrupting the global supply chain. To make matters worse, the climate crisis has started to unfold a decade earlier than climate models had predicted, causing nations to spend heavily to adjust to a climate that endangers food supplies and businesses alike.
Many businesses were caught off guard by the disruption brought by the pandemic. Now is the time for companies to prepare for what comes next.
Part 1: I’m Getting Too Old For This Shit
The dramatic decline in the working-age population will be one of the biggest drivers in the business environment for the next several decades. While the pandemic created significant short-term disruptions in the labor markets, the longer-term demographic changes are here to stay.
Working-age population (age 15-64) Peak: December 2018
The US total employment peaked in 2019 with 157.54 million people employed. In 2020, the labor pool (eligible workers age 16-65) permanently lost 2.8 million people – the first recorded decline ever. As the country recovers from the pandemic, more people will become employed while the underlying labor pool shrinks. As of August 2021, the number of people employed rose to 152.3 million.
The age dependency ratio (dependents age 0-15 and 65+ over working-age population age 16-65) will continue to increase over several decades as the baby boomers retire. Worldwide, the number of people aged 60 years and older is expected to grow 56% from 2015 to 2030, and 100% by 2050 to 2.1 Billion people.
The US hasn’t had replacement level fertility rates since the 1970s. Through immigration, the US labor force has been able to keep pace with job growth over the past two decades. Currently, 17 percent of the US labor force is foreign-born. However, in 2020, total immigration to the US fell for the fourth consecutive year to below 500K, which is a 50% decline from 2016 levels. If this trend continues, industries that are heavily dependent on migrant labor like agriculture could experience extreme wage inflation and rising food prices.
Recruiting international labor into the US will also be a challenge because global fertility rates are also in decline. The US is in a better position than any other advanced economy in the world. The US maintained near replacement fertility levels for 20 years, creating a sizeable millennial population that isn’t duplicated in other advanced economies. Only India and the African continent are seeing continued population growth.
These demographic changes will drive long-term labor shortages, and in turn inflation, and a focus on automation going forward.
Long Term Labor Shortages
The COVID Effect
On average, 2 million baby boomers retire every year. The pandemic caused a 50% increase in retirements in 2020, reversing a 20-year trend of increased average retirement age. The retiring boomer population is being replaced with a smaller population of younger, highly educated white-collar workers, leaving massive employment gaps in restaurants, retail, hotels, transportation, manufacturing, and construction. Wages are growing the fastest in transportation and warehousing at a 3-month annualized rate of 17.7%, followed by leisure and hospitality at 15.1%.
The airline industry laid off thousands during the pandemic and often favored +3 year early retirement programs for eligible boomers. Now that the economy is bouncing back and people are traveling again, airlines have a pilot shortage, and many permanently left the workforce. Airlines anticipate pilot shortages in the tens of thousands over the next decade. With the military to commercial training pipeline a fraction of what it once was, airlines are opening up their first training schools to train the next generation of pilots.
The Bureau of Labor Statistics predicts a shortage of nurses in the hundreds of thousands over the next decade. Current projections by Deloitte & The Manufacturing Institute expect a manufacturing labor shortfall of 2.1 million jobs by 2030.
Burning the worker demand candle at both ends, not only will the baby boomer retirement create a worker shortage, but it will also create more jobs in healthcare to care for the aging population.
Wage increases to woo workers can present a risky slippery slope. Decades of low wages have resulted in 4.8% or ~7 Million Americans working multiple jobs. Those second jobs could become unfilled as workers age or the wages from their other jobs increase, creating additional unemployment and wage pressures. As wages increase and people shed their 2nd or 3rd occupation, more jobs become available, increasing the need for workers, further increasing wages in a vicious cycle.
The American Academy of Physical Medicine and Rehabilitation estimates 11.1 million Americans are now living with long COVID. While we don’t know how many of those will end up on permanent disability, even a modest percentage would result in millions of additional workers leaving the labor pool.
These combined factors could create a self-reinforcing cycle of wage increases and potential supply-side inflation driving by cost and labor-induced shortages.
Productivity and Automation
For the US not to experience runaway wage inflation, labor productivity must increase through applied technology and automation. The automation revolution is already underway. Productivity surged 5.4% in Q1 2021, the most significant gain in 20 years.
Restaurants are experimenting with voice-recognition automated drive-throughs, ordering through apps, QR codes, and digital kiosks to make up for labor shortfalls. Grocery stores like Texas-based icon HEB have standardized online ordering and curbside pick-up, resulting in shopper and supply chain productivity. Many courts in all jurisdictions continue to use web conferencing for administrative proceedings to cut down on travel time and expenses. Business development officers have standardized the use of introductory meetings on Zoom before meeting face-to-face, not wanting to waste hours in transit for something that isn’t going anywhere.
What Companies Can Do To Thrive In A Declining Workforce Environment
The winners of this new game will be those who excel at automation and retention. Some ways to kickstart your efforts are:
- Invest heavily in productivity technologies wherever possible.
- Invest also in enhancing the efficiency of your current processes. Lean Six Sigma and other waste reduction methods are relevant to every industry.
- Focus on retaining the workers you have. High turnover rates will bleed businesses dry. We had one client in the trucking industry with a 300% turnover rate that was costing them $40M/year. To avoid this:
- Go through the exercise of finding out how much employee turnover will cost you to justify spending more on retention. Estimating how much employee turnover actually costs can be challenging because the impact is spread across a half dozen items on the P&L and in productivity losses, but this will be worth the effort.
- Tie employee compensation packages to the longer-term growth of the company through stock options and vesting periods.
- Tie executive compensation packages to the longer-term through potential multi-year clawback provisions that disincentivize extreme cost-cutting and reductions in force that once trimmed corporate excess in the ‘80s but now represents an existential threat to long term business operations. See the PG&E bankruptcy.