Help wanted: Charting the challenge of tight labor markets in advanced economies

What was behind the robust appetite for labor?

Since 2010, countries that have increased GDP fastest have done so primarily by adding more workers rather than by improving productivity. In markets such as Australia, the United Kingdom, and the United States, where labor has been relatively plentiful and consequently easier to hire, companies had a business rationale to add hours and employment rather than tackling the harder job of improving productivity. Countries where labor wasn’t so plentiful—Germany and Japan, for example—relied more on productivity growth to propel their economies, although that did not fully compensate for low labor force growth. In fact, labor productivity has stagnated in many advanced economies, as documented in previous McKinsey Global Institute reports.¹For more, see Investing in productivity growth, McKinsey Global Institute, March 2024, and Rekindling US productivity for a new era, McKinsey Global Institute, February 2023.

Even though all countries experienced a productivity slowdown after the financial crisis, some countries were more negatively affected than others. In Australia, productivity benefited from a commodity boom, while in the United Kingdom, underinvestment in regions other than the southeast may have exacerbated stagnating productivity.²Angelina Bruno, Jessica Dunphy, and Fiona Georgiakakis, Recent trends in Australian productivity, Reserve Bank of Australia, September 2023; Productivity in the UK: Evidence review, UK Productivity Commission, National Institute of Economic and Social Research, June 2022.

In the wake of the financial crisis, many people struggled to find work. In 2010, there were roughly 24 million excess workers, as measured by comparing the number of job seekers with the number of job openings, across the eight countries. Today the number of job seekers is close to the number of job vacancies.

However, the degree of excess supply (or no excess supply at all, in some cases) varies at the country level. Labor demand exceeded supply in Germany, Japan, and the United States at the end of 2023. Recently, Germany enacted a law aimed at increasing immigration of highly skilled workers, and in the United States efforts are under way to establish a federal commission to study labor shortages and find ways to address them.

The excess supply of unemployed workers relative to job openings in France and Italy was two million and one million, respectively. While these economies have meaningful slack in their labor markets today, even they have tightened. Their excess labor figures are 7.1 and 5.7 percent, respectively, down from prepandemic peaks well above 10 percent.

The factors that drove labor market tightness also varied across countries. Unemployment rates in Germany, the United Kingdom, and the United States came down from highs in 2010, while Australia never had very high unemployment. Italy continued to have a relatively high rate of unemployment but also increased vacancies, suggesting either a mismatch or a higher natural rate of unemployment. Meanwhile, demand increased markedly in Japan while its shrinking population constrained its labor supply.

The number of excess workers dwindled as growth in labor demand outpaced growth in labor supply. Labor forces in these eight countries grew between 2010 and 2023. Propelled by population growth and increased labor force participation that outweighed the impact of aging, 33 million workers in total joined their labor forces.

Over the same period, labor demand grew strongly, fueled by expansive monetary and fiscal policies as these countries recovered from the financial crisis. Employers needed to fill some 57 million additional jobs over the same period, or 24 million more than the number of available workers. Most advanced economies avoided subsequent downturns. This uninterrupted growth in demand not only drove average unemployment down from 8 percent to 4 percent but also created an additional ten million unfilled jobs across the eight economies.

During that time, people worked fewer hours on average, but the imbalance between job seekers and available jobs wasn’t due to that change. From 2010 to 2023, the average number of hours worked per employee fell from 37 to 36, a 3 percent decline roughly equivalent to just 33,000 workers in 2023. Declining working hours affect labor supply and labor demand equally, meaning the net effect is negligible.

Countries today have fewer than one million excess workers in aggregate: the number of job seekers is close to the number of job vacancies. What appears to be a perfectly matched labor market is in reality an extremely tight one, since some degree of excess supply is always the norm—matching is never perfect, and demand and supply are always in flux as workers switch jobs and employers shift strategies.

Increased job vacancies can constrain real economic output; they represent demand for goods and services that businesses are unable to fulfill. In seven of the eight countries—Japan is the exception—unfilled job vacancies in 2023 were higher than in 2019, before the onset of COVID-19, when they were in turn higher than their median levels from 2010 to 2019.

Unmet demand for labor can be addressed by finding additional new workers or by raising the productivity of existing workers. This can restore balance to labor supply and demand while creating additional output.

We estimate the additional output that would have been produced if labor markets were not so tight by examining the degree to which vacancy rates are higher than a structural or natural rate of vacancies. Structural vacancy rates vary across industries and countries and can even vary over time. To account for this, we compared sector-level vacancy rates in 2023 to vacancy rates in 2019 as well as to the median rate from 2010 to 2019. We find that, depending on the country, GDP could have been 0.5 percent to 1.5 percent higher in 2023 if that unmet labor demand had been filled.¹To estimate how much GDP might have been generated absent increased labor market tightness, we determined how many additional workers would be employed if 2023 job vacancy rates by sector fell to their historical level in 2019, or to their median vacancy rate level from 2010 to 2019, in each country. The output was estimated based on that number of workers and the average productivity per worker, at 2023 levels, for each sector. It is sensitive to the productivity assumption; we assume average productivity, but the potential productivity of unfilled vacancies could be lower than the sector average.

Across economies, average vacancy rates, or job vacancies as a share of total labor demand, increased by more than two percentage points from 2010 to 2023 in the healthcare, leisure and hospitality, and construction sectors.¹Includes seven of the eight focus countries. This data was not available for Japan. Conversely, job vacancy rates in the financial and real estate sector and the information sector, both high-productivity sectors with well-paid jobs, changed by less than one percentage point on average.

The pandemic hit the leisure and hospitality sector particularly hard as travel and tourism slowed. As restaurants and hotels reopened, they struggled to restaff. In Europe, some hotels hired people with little or no experience, and fast-food restaurants in the United States raised wages and shortened hours to cope with a shortage of staff.²Ryan Mann, Esteban Ramirez, and Matthew Straus, “Three innovations to solve hotel staffing shortages,” McKinsey, April 2023; Carol Kahn, “Sedona hotels cope with staffing shortages,” Sedona Red Rock News, October 29, 2021; Andrew Mills, Corina Pons, and Catarina Demony, “No experience, no resume, you’re hired! Hotels fight for staff,” Reuters, July 4, 2022; Joanna Fantozzi, “Restaurants are still dramatically decreasing their hours, new study shows,” Nation’s Restaurant News, October 28, 2022. Aggregate employment levels indicate that previous restaurant and hotel workers have rejoined the workforce, but they appear to have taken jobs in other sectors.

The healthcare sector has been strained as aging populations have driven demand for these services. The sector had the highest number of job vacancies among the sectors in our research, or 16.9 percent of all vacancies in 2023.

Vacancy rates also markedly increased in the construction sector, in part due to its cyclicality. Demand in the sector began climbing in 2010 after dropping sharply during the financial crisis. Today, strong demand for housing and government spending on large infrastructure projects, such as a €45 billion construction relief package in Germany and a $1.2 trillion package for infrastructure in the United States, have propelled vacancies.

Sectors fall into four groups depending on how vacancies grew in relation to employment: “labor hungry,” “labor attracting,” “labor disrupting,” and “labor efficient”.

Labor shortages have had the biggest impact on labor-hungry sectors, such as healthcare and construction, as previously noted. Demand for labor has risen faster than the sector’s ability to attract workers. Vacancies have increased in public and private healthcare systems despite efforts in countries such as the United Kingdom to attract immigrants to the sector, and construction is booming in most advanced economies due to housing shortages and infrastructure needs. Typically less capital intensive and more difficult to automate, these sectors added jobs at or faster than the average clip but not fast enough to keep pace with demand. In Canada, for instance, a recent House of Commons committee report acknowledged that the country has “longstanding issues with lack of supply of health professionals,” in part due to mental health issues and burnout exacerbated by the COVID-19 pandemic, which have led to retention issues.¹Sean Casey, Addressing Canada’s healthcare workforce crisis, Report of the Standing Committee on Health, House of Commons, Canada, March 2023.  And some Italian construction companies are turning to workforce development programs and partnerships with African universities to recruit and train new workers.²“Webuild CEO Pietro Salini: Ready to hire about 10,000 people in next three years to develop infrastructure in Italy,” Webuild Group, September 18, 2023.

Conversely, labor-attracting sectors like financial and real estate, information, and professional services have also added employment faster than average—they have attracted workers at a faster pace than their demand for labor has grown. In this group, only the professional services sector increased its share of overall vacancies.

Manufacturing is a labor-disrupting sector. Although the sector accounted for a smaller part of the workforce in 2023 compared with 2010 across the eight countries, its job vacancies nonetheless increased significantly, especially after 2019. Research by economist Richard Baldwin found that since 2013, the manufacturing sector has lost 20 million jobs globally due to productivity gains from increasing automation.³Richard Baldwin, “Where in the world are manufacturing jobs going?” Factful Friday with Richard Baldwin, LinkedIn, December 22, 2023. The mix of workforce skills has been changing, as some manufacturing jobs require more customer relations or analytics, and as corporate manufacturing footprints are themselves changing. For example, areas such as semiconductors and electric vehicle manufacturing are demanding more workers as a result of shifts in industrial policy and “friendshoring.”

Trade is a labor-efficient sector, in which productivity enhancements have eased the pressure to hire. As consumer demand has shifted, the retail segment of the trade sector has increasingly automated and digitized, increasing productivity and mitigating the impact of labor shortages. In Japan, for example, convenience stores are responding to staff shortages not only by relying on immigrant labor but also by rolling out technology like self-checkout and cleaning robots.⁴For immigrant labor, see “For a glimpse of Japan’s future, see its convenience stores,” Economist, April 4, 2024. For automation, see “Promotion of digitization to improve convenience,” FamilyMart, accessed May 20, 2024. For cleaning robots, see Fumika Nakashima, “Japan’s FamilyMart to roll out cleaning robots at 300 convenience stores,” Nikkei Asia, February 13, 2024.

What explains the differences between the shifting employment share and the shifting share of vacancies? Productivity and productivity growth are crucial factors: sectors with lower productivity and productivity growth had steeper increases in vacancy share. In a growing economy with a tight labor market, low-productivity sectors requiring the most labor per unit of additional output are likely to be most constrained.

Opportunities exist to boost productivity across sectors. The leisure and hospitality sector in the United States provides a case study. In 2021, the sector accounted for 16 percent of all job vacancies, a comparatively big share that was three percentage points higher than its average from 2010 to 2020. The sector responded to challenges posed by the COVID-19 pandemic by automating more processes and raising wages by an average of 29 percent from mid-2019 to mid-2023. Those steps increased the sector’s productivity by 6.4 percent over that period, decreasing pressure to hire and reducing its share of vacancies as its vacancy rate fell to 6 percent in 2023 from a decade high of 11 percent in 2021.

Demand for skill types is another lens through which the impact of a labor shortage can be examined. Our skills taxonomy comprises five broad categories—technological, social and emotional, higher cognitive, basic cognitive, and physical and manual skills, mapped to detailed occupations.¹See A new future of work: The race to deploy AI and raise skills in Europe and beyond, McKinsey Global Institute, May 2024. Here we analyze skills to understand increased job vacancy in the United States. While some conclusions could be extrapolated to other peer countries, they may not be universally true.

In an era of technological change, the most significant absolute shortage is in technological skills. Occupations relying on these skills, like software developers and other IT-related jobs, have been the hardest to fill since 2015, although the advent of generative AI may restore some balance. The changing skill mix within occupations has already shown up in the United Kingdom in increased references to the need for technological skills in occupational postings.²Rui Costa et al., “Old skills, new skills—what is changing in the UK labour market?” The Pissarides Review into the Future of Work and Wellbeing, Institute for the Future of Work, February 2024.

However, a shortage of physical and manual skills has likely exacerbated recent labor market tightness. Jobs requiring these skills had the lowest vacancy rate among the five broad skill categories, and job vacancies seeking these skills increased most since 2015. This reflects growing demand for manufacturing and repair workers as well as for some types of healthcare worker, like nursing assistants. For instance, Delaware has begun offering tuition assistance and other incentives to attract workers to study nursing in an effort to address a shortage of trained nurses.³See Johnny Perez-Gonzalez, “Delaware responds to nursing shortage with ‘Tuition Incentive Program,’” WHYY, December 13, 2023.

The occupations with the biggest increase in share of vacancies are associated with labor-hungry sectors such as food service, healthcare, and construction. Workers in these occupations mostly use physical and manual skills, which in many cases are challenging to automate and, in the case of healthcare occupations, likely to face unabated increases in demand as populations age.

Workers in occupations in which the share of vacancies declined most, by contrast, use physical and manual skills for only a small part of their work. Instead, these occupations, which include management, sales, financial operation, and computing, rely most heavily on social and emotional skills. Across all sectors, such occupations are often more highly paid; in some cases, they are likely to be a shrinking slice of the total workforce. Office support occupations could shrink as basic cognitive skills are increasingly automated, while sales is already a shrinking occupational category as e-commerce becomes a bigger part of retail trade and technological changes shift marketing dollars to other channels and assets.¹Michael Riely, Inside the decline of sales occupations, US Bureau of Labor Statistics Beyond the Numbers series, May 2020. Research by McKinsey has found that generative AI might accelerate the trend of automation in both of these occupational categories.²See The economic potential of generative AI: The next productivity frontier, McKinsey Global Institute, June 2023.

Jobs requiring a high proportion of physical and manual skills often have lower wages. In tight labor markets, wage dynamics shift based on workers’ changing opportunity costs, including options to move into higher-paying jobs. As US labor markets tightened, wages grew across the board, especially among workers in the lowest-paying occupations, and the biggest beneficiaries were workers who switched jobs.¹ David Autor, Arindrajit Dube, and Annie McGrew, The unexpected compression: Competition at work in the low wage labor market, National Bureau of Economic Research working paper number 31010, November 2023. Given that the labor share of production is about 60 percent across advanced economies, rising labor costs are highly relevant for employers and policy makers.²Based on data through 2013 for Germany, Japan, and the United States. See Loukas Karabarbounis and Brent Neiman, The global decline of the labor share, National Bureau of Economic Research working paper number 19136, June 2013.

Grouping US occupations based on average salaries, the occupations in the bottom half of the income range require physical and manual skills more than 40 percent of the time. Those lower-paying occupations in the third and fourth quartiles by income had the fastest wage growth from 2015 to 2022. The top half of occupations by income require physical and manual skills much less, and just 5 percent of the time among the top quartile of occupations by pay.

Even as labor markets have tightened, labor supply has grown. From 2010 to 2023, 34 million additional people joined the workforces across the eight countries, an average growth rate of 0.6 percent a year. The first factor influencing this growth is the expansion of population, both from so-called natural growth, or the net of new births and deaths, and from immigration. The second factor is linked to an aging mix of workers and had the opposite impact, pushing supply lower. The third factor is increased participation in the labor force, which helps mitigate the impact of aging.

The independent contribution of each of these three factors is clear. Had population alone grown, it would have accounted for 31 million of the 34 million added workers. Aging alone would have led to 18 million fewer workers as more seniors dropped out of the labor force. However, at the same time, labor force participation has increased, particularly among workers 55 years and older. The combined effects of these three factors net to 34 million additional workers.

The dynamics of these three factors varied greatly by country. Labor supply grew fastest in Australia and Canada, driven by strong population growth. Population growth also drove increased labor supply in the United Kingdom and United States, though more moderately than in Australia and Canada. Germany’s labor supply growth was due largely to increased participation rates, while France’s growth came from both population growth and more participation. In Japan and Italy, the impact of aging has been much more pronounced than in other countries, although for now increased participation has allowed for continued modest labor force growth.

A major challenge to labor force growth in the future is that the population growth rate has slowed in all eight countries since 2010 and is projected to continue to decline. In fact, populations in Japan and Italy are shrinking, and, according to United Nations estimates, the German population will begin to shrink by 2030.

Falling birth rates in many advanced economies largely explain their slower population growth. In some countries, immigration has also declined, exacerbating the trend. Immigration could have compensated for natural population decline, or when deaths exceed births, since 2015—if it had been roughly 1.5 to 3.0 times higher than current levels in Australia, Canada, Germany, the United Kingdom, and the United States. In France, Italy, and Japan, it would have needed to be even higher.

Immigration enables short-term labor supply growth. By contrast, it takes perhaps 20 years for natural increase in a population to affect the labor market, because a baby born today cannot meaningfully work for roughly 20 years. Many immigrants are of working age and so can participate in the labor force today.¹“Foreign-born workers: Labor force characteristics—2023,” US Bureau of Labor Statistics press release, May 21, 2024. For instance, the Congressional Budget Office estimates that the US labor force in 2033 will be larger by 5.2 million people, mostly because of higher net immigration.²Phillip L. Swagel, Director’s statement on the budget and economic outlook for 2024 to 2034, Congressional Budget Office, February 2024. Research by the Brookings Institution suggests that an unexpectedly high level of net immigration explains the recent fast pace of added employment in the United States.³Wendy Edelberg and Tara Watson, New immigration estimates help make sense of the pace of employment, Brookings Institution, March 2024.

Beyond their slowing population growth, all the countries in our sample are aging, a trend that will intensify as members of the baby boom generation become older. This creates an obstacle to labor force growth because older people often work at much lower rates, especially past the age of 65.

The proportion of the working-age population, or people over 15 years old, that is 55 years and older increased from 2010 to 2023, and the United Nations projects that that share will grow even more by 2030. At that time, about half of the working-age populations of Germany, Italy, Japan, and the United Kingdom will be older than 55, and almost one-third will be older than 65. Populations are younger in Australia, Canada, and the United States, where by 2030 roughly two-fifths of the working-age populations will be older than 55.

As countries aged overall, labor force participation among older cohorts of the working-age population increased.

Even as aging populations pose a potential drag on labor force growth, people have been working more at almost every stage of life in all eight countries. (The exceptions are 15- to 24-year-olds in Canada, Italy, and the United Kingdom, who are working less; similarly, 25- to 54-year-olds in France are working slightly less.) For example, in the United States, shifts in the overall age mix pushed the aggregate labor force participation rate lower from 2010 to 2023, yet the participation rate grew, albeit marginally, in every age cohort over the period.

Everywhere, older people are working longer. The largest increases in labor force participation have been among those 55 years and older (with the notable exception of the United States, where work in that cohort increased only modestly). From 2010 to 2023, participation among this cohort grew 23 percentage points in Italy, 15 points in Germany and France, and 12 points in Japan. This increase in participation rates reflected shifting pension policies and attitudes toward retirement. For instance, Italy switched to a defined-contribution retirement system and increased its retirement age in 2011.¹Margherita Borella and Flavia Coda Moscarola, The 2011 pension reform in Italy and its effects on current and future retirees, working paper number 151/15, Center for Research on Pensions and Welfare Policies, September 2015. And long before the COVID-19 pandemic put labor market tightness onto the global radar, Japanese companies struggling to find workers in an aging society were tapping the country’s Silver Jinzai Centers. These community centers for older people traditionally found retirees to help maintain parks or manage parking lots, but more recently, a wide variety of Japanese corporations are enlisting them to find workers for jobs they can’t otherwise fill.²Ippei Hoshi, Shinichiro Yamaguchi, and Nobuaki Takada, Changes in elderly employment: New roles of “Silver” Human Resources Centers, Nomura Research Institute, March 2017; Daisuke J. Nakajima and Jeffrey D. Korzenik, “How America can bring the Japanese economic miracle stateside,” Wall Street Journal, June 5, 2023.

The shaded bars in the accompanying exhibit illustrate how labor force participation rates might grow if trends in participation rates for each age cohort continue to 2030 in line with the trend set from 2012 to 2023. In the United States, labor force participation rates didn’t change much over that period, but in countries like Italy and Japan, where participation rates have shifted markedly, achieving the past trend could yield significant increases in labor force participation rates.

One component of rising participation rates is the narrowing gender gap. We compared the ratio of female and male labor force participation rates and average hours worked per week to approximate the gender gap in the workforces of our focus countries. We found the gender gap has been shrinking since 2010, more significantly in labor force participation than in hours. About 60 percent of the workers who joined the labor force from 2010 to 2023 were women. In Italy, Japan, and Germany, the narrowing gender gap is due entirely to women participating in the labor force more. In other countries, the ratio climbed as women increased their labor force participation while participation among men declined, by as much as three percentage points in some places.

Currently more women work part-time than men, likely due to different responsibilities in the household. Improving labor force participation among women may therefore be encouraged by flexible working arrangements and access to care support. For example, Japan has made progress on its gender gap in part through a set of policies called Womenomics that include providing daycare support and tax incentives to encourage married women to join the labor market.¹“Japan introduces ‘womenomics’ to counter the country’s aging workforce and boost GDP,” Council on Foreign Relations, accessed May 20, 2024. Such interventions could increase the contribution of women to labor supply growth and reduce tightness in the labor market.

Looking ahead, we examined two possible scenarios for labor force participation rates in 2030. In both cases, labor force growth slows.

• A stable scenario, in which labor force participation rates in each age cohort remain constant at 2023 levels between now and 2030.
• A growth scenario that assumes that trends in 2010–23 participation rate growth for each age cohort continue to 2030.

In the stable scenario, France, Italy, Germany, and Japan may have smaller labor supplies by 2030. In fact, even if labor participation rates continue to grow at the same rate as in the past in Germany, Italy, and Japan, their labor forces won’t increase. By contrast, Australia, Canada, the United Kingdom, and the United States are likely to see increases in labor supply under either scenario, although at a slower pace than over the past 13 years, due to stronger expected rates of immigration.