Dealing with Labor Shortages

Many leading developed economies have an impending population demographics problem. Birth rates are insufficient to maintain the population size and, perhaps, support the aging population into retirement. This issue touches political, economic, and social topics - possibly being transformative in shaping the future. For companies, skilled workers - particularly young professionals - may be hard to find. Germany is a great example. The country has a strong, resilient, and advanced industrial economy which produces highly specialized, high quality goods, which are exported across Europe and beyond. Unemployment rates have remained low in Germany, despite an influx of immigrants from the refugee crisis, which peaked in 2015. Herbert Striebich, who runs a freight company in Baden-Württemberg, reported last month in the Financial Times that “you cannot believe how hard it is to find people” and that substantial turnover improvements could be realized if he could find the staff (Buck 2018). This anecdotal evidence is insightful, but perhaps not compelling alone. However, unemployment rate numbers certainly support the observation.

Unemployment-Rate-Plot-from-the-Financial-Times

Figure 1: Unemployment Rate Plot from the Financial Times (Buck 2018)

A potential solution to this problem, in Germany and elsewhere, is liberal immigration policies for skilled workers. Berlin has a well-known program for the immigration of self-employed and freelance workers who pose “economic interest [to] the state of Berlin” (The Senate Chancellery of the Governing Mayor). This program is a good example of governments giving skilled workers the incentive to emigrate. The program requirements below show a clear focus on economic value. Across the globe, governments are increasingly joining corporations in the active recruitment of top talent.

Berlin-Residence-Permit-Issuance-Requirements

Figure 2: Berlin Residence Permit Issuance Requirements (The Senate Chancellery of the Governing Mayor)

Using immigration as a remedy for a skilled labor shortage is a controversial practice. Nationalist attitudes can be strengthened by influxes of immigrants - particularly those from non-Western countries or, in the case of Germany, outside of the European Union.

By working with a client in Berlin for about six months now, I’ve gained some insight into the German labor market. Indeed, this client has some difficulties in acquiring and maintaining the software engineering talent needed to maintain growth. Hiring skilled workers from other European Union countries is a regular practice - so much so that German engineers are the minority. Skilled engineers from the Czech Republic and Spain fill the gaps by contributing their talents. The Czech Republic and Spain, however, are suffering with similar demographic challenges. So while Germany may benefit from European Union skilled workers, the result is that labor shortages are just passed around the European Union. Not a single country in the union had a birth rate exceeding the replacement rate of approximately 2.1 in 2009, so finding labor surpluses within the EU is a losing proposition (The RAND Corporation 2011). A more global, and perhaps effective, solution is the facilitation of immigration from countries with higher birth rates and large quantities of skilled professionals. Countries like India are a good example and, indeed, skilled worker immigration from India is substantial in countries like the United States. H-1B visas in the United States are issued to foreign skilled workers - India accounting for 71% of those H-1B visa issuances in 2015 (Jan 2017). In that same year, 547,000 H-1B applications were submitted for 85,000 openings (Jan 2017).

Increasing immigration quotas for workers from Eastern countries is controversial, but can be better understood through the triangulation of a few key perspectives. The liberal, economic nationalist and structuralist perspectives are perhaps the three most informative perspectives to consider for this topic. These perspectives are distinct and complementary, in the sense that they are unique worldviews but can be considered together for a better understanding of the topic as a whole.

Through the liberal worldview, everyone wins when migrant flows bring professionals from countries with poor work opportunities to countries with great work opportunities. The meaning of the word “liberal” has changed substantially over recent years, but here the term is used in the more classical sense. The classical “liberal” here believes strongly in the power of the market and the “invisible hand” to achieve economic efficiency. From this liberal point of view, this type of migrant flow improves global economic output and overall prosperity. The aphorism “a rising tide lifts all boats” is relevant here, and even the country undergoing the talent exodus will eventually benefit from the increased global economic productivity. In the shorter term, remittances may provide the origin country with economic benefit. Further, if a country becomes well-known for professional talent, then foreign investment in recruiting organizations and education systems could improve the origin country’s economy. In any case, the liberal perspective suggests that these migrant flows are an overall winning proposition.

Economic nationalism is a perspective with ever-increasing support recently. Economic nationalists from both migrant origin and migrant destination countries may view the situation as a loss. In the origin country, economic nationalists may claim that their country will suffer labor market damage by the destination country. Perhaps the destination country is seen as taking advantage of the relatively cheap origin country labor market. The talent exodus would leave the origin country with less talent to drive economic growth. Economic nationalists in the destination country may also view the situation negatively. In this view, the foreign workers would be taking jobs away from the native population. Declines in wages and working conditions may also be predicted by this group. Overall, the economic nationalist perspective echoes protectionist economic sentiments, with any migrant flows to be looked upon negatively.

From the structuralist worldview, migrant flows worsen income inequality and welfare problems - being bad on the whole. The structuralist perspective is deeply rooted in the Marxist ideology. As such, the focus for people with this worldview tends to be on how the rich, asset-owning class disproportionately controls social, political, and economic trajectories. From this perspective, migrant flows provide “more fuel for the fire” as the ruling capitalist class continues to exploit the working class. The structuralist perspective may predict rising income inequality, a drop in working conditions, and increased influence of large corporations over societal and political domains. Further, structuralists would draw attention to a possible decline of labor union power when migrants come in to fill job vacancies.

Depending on your political orientation, the liberal, economic nationalist, or structuralist view may sound more compelling. In any case, these three perspectives are all popular mindsets in the world, and each is important in an overall analysis. For example, a government may choose to follow the liberal perspective and encourage migrant flows, while setting up social safety nets and restructuring tax code to minimize income inequality and social welfare concerns. Policies to facilitate skilled worker migrant flows should be carefully controlled and measured. Data is increasingly available for policy making, and should be leveraged both initially and after policy implementations, in order to assess policy impacts.

Software engineering is particularly badly affected by labor shortages, as software engineering is a growing field with demand outstripping supply. The Bureau of Labor Statistics claims “employment of software developers is projected to grow 24 percent from 2016 to 2026, much faster than the average for all occupations. Software developers will be needed to respond to an increased demand for computer software” (“Software Developers Occupational Outlook” 2018). There are a lot of initiatives to promote and teach software engineering at universities, through non-traditional educational platforms like Edx and Udacity, and secondary school institutions. However, it’s unclear if the supply will catch up with demand. So while labor shortage concerns may not be an imminent concern for some businesses, software organizations cannot afford a passive approach.

In developing a strategy around labor shortages, a foreign country’s birth rates and the quantity of skilled workers is only one of many considerations. An important second consideration is the country’s culture and social/political environment. These factors cannot be separated from the analysis. For example, some cultures look negatively upon moving to another country or being separated from family. Other cultures may take a more adventurous and open-minded outlook on emigration. Among advanced economies, the populations of Russia, Germany, and the United States are some of the least willing to move to a new country for a great job. Meanwhile, the populations in France, Mexico, and the Philippines are some of the most willing to move to a new country for a great job. In these two examples, the average mobility of job seekers is 48%-58% and 83%-94% respectively (Strack 2014). So a labor shortage strategy based on recruitment of skilled workers from Russia will only be about half as effective, on a per capita basis, as a similar program targeting skilled workers from France.

At the very least, business leaders should understand where their country ranks on labor shortage concerns. Some western countries, like the United States, don’t have as poor a situation to deal with. Labor shortage/surplus projections for some advanced industrial economies are provided below. Except in the case of large migrant flows, these numbers are unlikely to change substantially.

Projected-Labor-Shortages/Surpluses

Figure 3: Projected Labor Shortages/Surpluses (Strack 2014)

Ultimately, software businesses are naturally well positioned to leverage technology when overcoming these challenges. Whether relatively decentralized freelancing/outsourcing systems like Upwork provide the foundation for a solution, or something more unusual like decentralized autonomous organizations (DAO), software businesses should start early in developing a strategy to acquire and maintain top technical talent. This will be naturally complemented by more traditional human resource initiatives and company culture transformations. In times of shortage, innovation and creativity prosper. While it’s easy to look pessimistically at the coming labor shortage concerns, there will ultimately be many opportunities for those with the ingenuity and ambition to seek them out.

References

Buck, Tobias. “Germany Looks to Foreign Workers to Tackle Labour Shortage.” Financial Times, Financial Times, 29 Aug. 2018, www.ft.com/content/c1626f0c-a6f2-11e8-8ecf-a7ae1beff35b.

Jan, Tracy. “This One Group Gets 70 Percent of High-Skilled Foreign Worker Visas.” The Washington Post, WP Company, 3 Apr. 2017, www.washingtonpost.com/news/wonk/wp/2017/04/03/this-one-group-gets-70-percent-of-high-skilled-foreign-worker-visas/?noredirect=on&utm_term=.0dc600d8ca3e.

“Midnight in Munich: All European Union Countries Face Declining and Aging Populations.” RAND Corporation, The RAND Corporation, 2011, www.rand.org/pubs/periodicals/rand-review/issues/2011/winter/-europe.html.

The Senate Chancellery of the Governing Mayor. “Residence Permit for the Purpose of Self-Employment - Issuance.” Service-Portal Berlin, Federal State of Berlin and BerlinOnline Stadtportal GmbH & Co. KG, service.berlin.de/dienstleistung/305249/en/.

Strack, Rainer. “The Surprising Workforce Crisis of 2030 - and How to Start Solving It Now.” YouTube, TED, 3 Dec. 2014, www.youtube.com/watch?v=ux1GxExRUUY.

“Software Developers Occupational Outlook.” U.S. Bureau of Labor Statistics, U.S. Bureau of Labor Statistics, 13 Apr. 2018, www.bls.gov/ooh/computer-and-information-technology/software-developers.htm.