The war for talent is about to get rough

The concept of the war for talent first emerged back in the 1990s. The term is, however, not outdated at all. The current shortage of high-skilled labour is posing a substantial threat to European business (see KBC Economic Opinion of 5 September 2017). Firms will increasingly be confronted with the problem of finding and keeping enough employees with the right skills. Long-term trends like population ageing only add to this issue. Recruiting and retaining talented workers will hence be of utmost importance to firms going forward. Meeting employees’ changed demands, keeping older workers engaged and increasing productivity will be the main arms in fighting this war.

Known and new battles

The war for talent is a term that was first coined at the end of the 1990s by McKinsey & Company. It was defined as increased competition for recruiting and retaining talented employees. The authors described talent as the sum of a person’s abilities. In this sense, talented employees are considered as the best at the top of the firm. However, the concept of talent has been evolving ever since with broader interpretations. Companies also use talent as a synonym for their full workforce that has the necessary skills for its activities. The war for talent is hence not a new phenomenon. However, since its introduction, new challenges have emerged and some known causes have deteriorated. As a consequence finding and keeping qualified employees has become a more serious concern for firm leaders (figure 1). In PwC’s 20th CEO Survey (2017) more than 75% of the CEOs questioned indicated that they are worried about the availability of key skills, making it the third biggest threat to companies’ growth prospects. Several factors will keep this issue on the top of employers’ minds. First, professional mobility, especially among younger generations of workers, has risen. New generations of workers are more inclined to change jobs in order to find better career opportunities. Furthermore, labour mobility between EU countries is on the up. The main destination countries in 2015 were Germany and the UK. The downside of this development are large outflows of well-educated working-age people, mainly from Eastern European countries (notably Romania and Bulgaria in recent years) where labour shortages are intensified. Globalisation reinforces this, not only within the EU but across the world. Second, the priorities of younger generations seem to have changed. A good work-life balance has become more important in determining where to work. Besides wages, this will be an extra field of competition in recruiting and retaining workers. In addition, technological advances have changed the needs for specific talents and skills. As educational systems in general haven’t been able to fully catch up with these processes, mismatches between labour supply and demand have grown. What’s more, long-term demographic trends like population ageing are adding to these pressures.

Figure 1 - Availability of key skills becoming a more important concern (% of respondents who answered “somewhat or extremely concerned about…”)

Source: KBC Economic Research based on PwC Annual CEO Surveys

The role of population ageing

Ageing in the European Union is taking place at different speeds and with a notable variation in outcomes between EU countries. Nevertheless, it is a general trend across the region and all EU Member States are projected to see a rising share of elderly in the total population over the coming decades. One of the societal and economic challenges this demographic shift will bring is the decline in the potential labour force. The population at working age (i.e. 15-64) has been trending down for some years now in the EU as a whole. As ageing is expected to accelerate, the European Commission forecasts a substantial decline in both the number of people aged 15-64 and their share in the total population for the coming decades. Germany, Southern Europe and the Eastern European countries are expected to see the most substantial decline in the potential labour force. On top of this, the potential labour supply is not equal to the actual labour supply. For example, in the later stages of their working years people tend to have lower participation rates. Hence, the actual labour force will be even smaller than the potential one. The success of recent pension reforms in Europe will depend to a great extent on the ability of effectively keeping older workers in employment as pension ages rise. With an EU average employment rate among people aged 55-64 of just 55.2% in 2016 there is considerable scope for improvement. Besides the impact on economic growth at macro level, a shrinking workforce obviously has a number of implications for individual businesses as well. It will cause and enforce labour shortages which in turn will lead to an even fiercer war for talent. The most prominent case of labour shortages in the world as a consequence of a rapidly ageing population is Japan. Labour shortages there are already so severe that the number of open permanent jobs exceeded the number of applicants in the summer of this year.

To arms!

Recruiting and retaining talented and sufficiently skilled employees will hence be of utmost importance to firms going forward. The focus here will have to be two-sided. On the one hand, being and staying attractive to new employees will remain a key factor. This can be achieved by meeting workers’ changed demands for a better work-life balance. The recent announcements of firms offering extended paid parental leave programmes are just one example. On the other, the older generations should be motivated to remain active in the organisation as long as possible. Governments’ pension policies can play a large role in this by providing the right incentives (or at least by not providing the wrong incentives). But companies also need to invest more in retaining older employees in order to mitigate the effects of a shrinking labour pool.

In the end, reaching the same activity level with less people will require firms to increase their productivity. One way of doing this is to make capital investments that increase the productivity of a firm’s equipment. Another way is to raise human productivity. One way to obtain this is to give everyone sufficient and regular training. Lifelong learning throughout careers will become more important, especially to make sure that all employee generations remain up to date. Businesses often think that training for their older employees is not cost-effective as the payback periods are generally perceived as lengthy. However, this need not be the case in practice. Furthermore, training moments are an opportunity for older workers to pass on their experiences and tacit skills to younger colleagues. Training will, moreover, keep employees more engaged which will in turn increase their loyalty towards the company. After all, the trick for companies will be to keep those well-trained employees in their organisations. Otherwise, all their efforts will have been for nothing.

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