This past June, the McKinsey Global Institute published one of the most comprehensive reports I have seen on the high unemployment and jobless recovery the US has been going through for the past few years - An Economy that Works: Job Creation and America’s Future. The report is based on a McKinsey research study that surveyed 2,000 business leaders, conducted detail interviews with a number of human resource executives, examined in depth those sectors of the economy with the highest potential for growth, developed a number of detail scenarios for how the US employment picture might evolve into the future, and made several concrete recommendations on what the country should do to address our very serious unemployment issues.
Right at the beginning the report hits us in the face with a few statistics highlighted in big text that succinctly capture the job picture in 2011: US jobs have declined by 7 million since December 2007; 20% of men are not working today, up from 7% in 1970; there has been a 23% drop in new business creation since 2007; the jobless recovery is projected to last 60 months; 10% of Americans move annually, down from 20% in 1985.
The very next page uses the same big text format to summarize the very tough challenges the country faces: we need 21 million jobs by 2020 to return to full employment, - that is, to return to the 5% pre-recession unemployment level instead of the current level of over 9%; the job-growth scenarios modeled by McKinsey ranged from 9.3 to 22.5 million, so only their most optimistic high growth scenario gets us back to full employment; in 2020, there will likely be a 1.5 million shortage of college graduates in the workforce; even today, 40% of companies have had job openings for six months that they have not been able to fill due to lack of the proper skills; and 58% of employers said that they will hire more temporary and part-time workers.
“The United States faces an immediate challenge:,” the executive summary starts out saying, “finding employment for 7 million people still out of work from the 2008–09 recession and reviving robust job creation in the decade to come. But simply employing a nation’s people is not enough. In a globalized, information-age economy, there is no more important economic priority than building a strong workforce.”
But, for the past 20 years, companies have responded to recessions not only by laying off workers, but also by making major operational changes to significantly improve their productivity and reduce the overall employment needed once the economy recovers. As a result, many of the layoffs are permanent. Many lost jobs are not coming back. Once the economy recovers, many of the new jobs are likely to emerge in different industries and occupations from where the jobs were lost, often requiring new skills and relocation to a different area.
This is evident in the increasing lag between the recovery of the economy and the return of employment to their pre-recession levels. The jobless recovery periods are now significant longer - 15 months after the 1990-91 recession, 39 months after the 2001 recession, and in all likelihood, it will take more than 60 months for employment to recover, while GDP reached its precession level in December of 2010.
To return to pre-recession employment levels by 2020 the US economy needs to create 21 million net new jobs. To see how this might be possible, the McKinsey study developed three different scenarios based on the data gathered through their surveys, interviews and economic analysis. They built their scenarios by analyzing in depth the six sectors of the economy that, due to their size and growth potential, would most impact overall US employment in the next decade: health care, business services, leisure and hospitality, construction, manufacturing and retail. These six sectors account for 66 percent of private employment today, and McKinsey estimates that they will account for 70 to 85 percent of job growth in the coming decade.
Only their most optimistic scenario would return the economy to full employment, i.e., 5 percent unemployment, by the end of the decade. In this high-job-growth scenario, the economy would grow by an average of 1.5 percent CGR and add 22.5 million new jobs by 2020. In the midrange scenario, the economy would grow 1.2 percent CGR, 17 million jobs would be created, and the unemployment rate would be nearly 7 percent by 2020. The low-job-growth scenario estimates that the economy would only grow by 0.6 percent CGR through the decade, 9.3 million jobs would be created and unemployment would continue at our current high levels.
Unlike a number of other advanced economies with aging populations, the US labor force is expected to continue growing, from roughly 154 million in 2010 to 169 million by 2020. So will the need for better educated workers with specific skills requirements. By 2020, 34 percent of the workforce is projected to have a college degree or higher, - up from 31 percent today, 25 percent in 1995 and only 13 percent in 1970. Nevertheless, the McKinsey study projects a shortage of 1.5 million college graduates if the high-job-growth scenario is achieved. It also estimates that by 2020, about 26 percent of US workers will have a high school diploma with no additional post-secondary education, - about .8 million more than the number of available jobs with that level of education, and that 12 percent will not have completed high school, - almost 6 million of whom will not be able to find jobs.
But the supply-demand gap is not just in education. There is also a skills gap. Many workers with post high school education will not necessarily have the skills needed for the jobs that are likely to most be in demand. According to McKinsey, employers are already having trouble filling positions requiring technical skills, yet the US is expected to produce over twice as many graduates in business and social sciences as in the STEM fields, - science, technology, engineering and math.
The hardest occupations to fill are in science and engineering, followed by computer programmers and IT workers. Management positions are going to be in high demand, especially in information intensive industries. Skill shortages are also likely in a number of fields that students in community collages and vocational schools should be training for, including health care oriented jobs like nursing aides and nutritionists, and technical jobs like welders, electricians and mechanics that are using increasingly sophisticated technologies and tools.
This projected educational and skills gap is further evidence that society is undergoing a historical transformation towards an increasingly information-intensive and knowledge-based economy. Such an economy requires higher levels of education and different skills than in the past.
In addition, enterprises are going through dramatic changes, driven by advances in information technologies and the heightened competitive pressures brought about by globalization. Companies are relying on business partners around the world for many of the functions once done in-house. Vertically integrated enterprises are unbundling a number of their components, becoming virtual enterprises and developing sophisticated networked business ecosystems
Networks are also transforming the very nature of work and employment. More jobs are expected to be done remotely and collaboratively. More than half of the employers that participated in the McKinsey survey expect to use more part-time, temporary and contract workers to give them added flexibility in dealing with an unpredictable economy.
“The old paradigm of a life with a single employer has faded into history. In this decade, we see that the traditional 9-to-5, Monday-to-Friday work week may fade, too - along with the traditional office and the customary relationship between employee and employer. For a growing proportion of the labor force, the jobs that workers find in the coming years - and those they hold now - may look nothing like what they are used to.”
As a result, an increasing number of workers must be prepared to be on their own and start their own companies at some point in their careers, instead of working directly for a large company. Many of these small companies will be part of the business ecosystem of the larger enterprises. This is one of the major forces driving us to become an increasingly entrepreneurial economy.
The overriding recommendation in the McKinsey report is that: “Job creation must become a national priority, not a by-product of other policy decisions.” It is the only way that the country will achieve the high-job-growth scenario and get back to full employment.
In addition, the study makes specific recommendations across four dimensions:
“Skill: ensuring that Americans acquire the skills that match employer needs.”
“Share: helping American workers win “market share” in an expanding global economy.”
“Spark: encouraging innovation, new company creation, and the scaling up of new industries in the United States.”
“Speed: removing impediments to investment and job creation.”
It offers a number of concrete actions in each of these four dimensions. For example, it suggests that to help students understand which skills employers are looking for: “Businesses can become more involved in developing curricula in community colleges and vocational schools, and a national jobs database could provide the basis for informed decisions about majors and training programs.”
And, to simplify regulatory procedures that create obstacles to job creation, and speed the resolution of investment decisions, it makes several recommendations, such as: “Plug and play enterprise zones, which would be preapproved for most zoning and environmental permits, could cut in half the time needed to bring a new plant online”
Finally, creating a 21st century economy that works for everyone, - individuals and communities as well as business and government, - requires that we come together and agree to try fresh new ideas suitable for our changing environment. As the excellent McKinsey report reminds us:
“Waiting for the US job market to correct itself and depending on the solutions of the past will not hasten the return to full employment or set the stage for sustained job creation in the years to come. To create the jobs that America needs to continue growing and to remain competitive, leaders in government, business, and education will have to be creative - and willing to consider solutions they have not tried before. Workers themselves will need to acquire the right skills and to adapt to a future of lifelong learning and new ways of working. As Peter Drucker warned, ‘The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.’”