At a glance
- Labor markets in advanced economies today are among the tightest in two decades, not merely a pandemic-induced blip but rather a long-term trend that may continue as work forces age.
- Tightness means forgone economic output. We estimate that GDP in 2023 could have been 0.5 percent to 1.5 percent higher across these economies if employers were able to fill their excess job vacancies.
- Companies and economies will need to boost productivity and find new ways to expand the workforce. Otherwise, they will struggle to exceed—or even match—the relatively muted economic growth of the past decade.
- Actions for companies and policy makers include:
- Focus on skilling and reskilling, including attracting talent from unconventional pools, offering more flexible work, and internal mobility.
- Encourage foreign-born workers with programs to properly integrate them into the workforce.
- Shape retirement policies to encourage people to work beyond standard retirement ages and take steps to attract more women into the workforce, for example, by offering elder or childcare infrastructure.
- Prioritize investment in labor-complementing and labor-substituting AI and automation to unlock productivity.
Labor market tightness is a persistent challenge. Though loosening somewhat since their 2022 peaks, labor markets in advanced economies remain tighter than at any other time over the past two decades. This is not a pandemic-induced phenomenon. Rather, it continues a long-term trend that started in 2010, when advanced economies began their protracted recovery from the 2008 financial crisis.
Shifting demographic forces could intensify this trend in the future. As workforces age and population growth decelerates, countries cannot count on excess workers to power economic growth. Absent concerted efforts to boost productivity or increases in the workforce through higher participation or immigration, many advanced economies will struggle to exceed—or even match—the relatively muted economic growth of the past decade.
So far, the impact of the labor market squeeze has been unevenly distributed. Job vacancies have climbed most steeply in sectors that traditionally have low productivity, such as healthcare and hospitality, as well as those with stagnant productivity, like construction. Without action, labor shortages may continue to hit sectors that struggle to increase productivity.
Tight job markets present both challenges and opportunities. Job seekers find work more easily and may garner higher wages. Yet upward wage pressure can spur inflation and stress businesses, particularly smaller ones. For instance, companies may need to turn down orders because they can’t hire enough workers to satisfy demand. At the economy level, we estimate that GDP in 2023 could have been 0.5 to 1.5 percent higher in the biggest advanced economies if employers had been able to fill their job vacancies.
Businesses large and small will need strategies to confront persistent labor shortages. Deploying and adopting technologies is one way they can power productivity growth. Retraining programs can help workers gain new skills needed as technologies shift, and matching programs can pair people with jobs. Businesses also can expand their hiring pools, including by seeking to attract immigrants and people who might otherwise sit on the sidelines.
Against this backdrop, this article examines labor markets in advanced economies using 20 charts to illustrate conditions in labor markets today, future prospects, and actions to address shortages. These labor markets range across 30 economies in Asia, Europe, and North America, with a particular focus on the eight largest: Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
Tightness is the trend
Today’s tight labor markets reflect longer-term trends in vacancy and unemployment rates across advanced economies.
Since 2010, labor markets have tightened across all 30 advanced economies we analyzed. Comparing job vacancies to numbers of unemployed job seekers provides one measure of labor market tightness. The number of job vacancies per unemployed person increased by more than four times on average across these economies between 2010 and 2023, and by almost seven times in the United States.
Image description: A line chart plots 30 lines, starting on the left with mostly low up-and-down volatility and rising upward to the right with higher volatility. Each line represents an advanced economy, and the 8 countries featured in the text are highlighted. The vertical axis shows the number of job vacancies per unemployed person, starting at 0 on the bottom and rising to 2.5. The horizontal axis shows years, from 2000 on the left to 2023 on the right. The lines stay below 1 on the vertical axis until about 2015, when many of the lines rise closer to 1, with 8 of them surpassing 1, including the US, Japan, and Germany. Annotations next to the graph note that in aggregate, the job vacancy rate rose by a multiple of 4.2, and the individual multiples for the 8 highlighted countries ranged from 2.3 to 6.7. End of image description
Labor shortages have appeared across a diverse group of countries that have no apparent common features other than their stage of development. Tightness is particularly acute in seven countries—Czech Republic, Germany, Japan, the Netherlands, Norway, Singapore, and the United States—that have more vacancies than unemployed workers. Together these countries account for 53 percent of the total labor supply of the 30 advanced economies in our research, and 64 percent of collective GDP. In another seven countries, the number of job vacancies is 0.5 to 1.0 times the number of unemployed workers. Australia, Canada, and the United Kingdom are in this group.
But not all large economies have labor shortages. For example, labor markets in France and Italy remain relatively slack, as they do in 14 other countries among the 30. This group collectively accounts for 31 percent of total labor supply and 20 percent of total GDP. Yet even in most of these places, labor markets have tightened. Vacancies per unemployed person have increased by five times in Italy and by almost four times in France.
The tightening trend began after the 2008 financial crisis, when job vacancies were dwarfed by a vast number of unemployed people. The recovery was slow: labor markets in these 30 economies took 8.2 years on average to reach the degree of tightness they had before the crisis.
The desire to hire carried on apace, and labor markets continued to tighten until the COVID-19 pandemic took hold in early 2020. During the pandemic, many labor markets oscillated, first to extreme looseness and then to extreme tightness. Generous fiscal stimulus measures during the crisis fueled a comparatively fast job recovery, and by 2022, labor markets had achieved the highest ratio of job vacancies to unemployed people in two decades. Today, labor markets remain historically tight but have cooled somewhat from that peak. For instance, as of April 2024, the vacancy-to-unemployment ratio in the United States had dropped to 1.2 from 1.4 at the end of the prior year.
Across the eight focus economies, labor markets have retreated from peak tightness during the COVID-19 pandemic toward conditions more similar to the rising prepandemic trend. Only Italy, which had one of the loosest labor markets among developed economies before the pandemic, shows no signs of declining tightness yet. This could be the result of the Italian government’s fiscal response to COVID-19, which the International Monetary Fund estimates exceeded 45 percent of the country’s GDP, making it the most generous relief package among advanced economies. Japan, where the labor market was among the tightest before the pandemic, lags its prepandemic trend, in part because a weakening yen increased costs in the import-dependent economy. Nonetheless, job vacancies remain 1.2 times the number of job seekers.
Image description: Eight line charts, 1 for each of the highlighted countries, plot the same data from the previous exhibit, job vacancies per unemployed person, from 2015 to 2023. The lines mostly rise from left to right, with a sudden plunge and recovering rise over the initial pandemic years of 2020–21. Each graph includes a second line that starts in 2019 and rises steadily upward to the right, plotting the continuation of each country’s 2015–19 trend. The first lines plotting the actual post-2019 data mostly show a return to the trend illustrated by the second set of lines. End of image description
Overall, the appetite to hire continues along a rising trend line, outpacing the number of workers seeking jobs.
Who’s feeling the crunch?
Employers in some sectors have felt the impact of the labor shortage more than others, and appetite for physical and manual skills has unexpectedly intensified.
Growing the supply-side pie
Labor supply has struggled to keep up with overall demand due to shifts in demographics—and that’s unlikely to change, according to projections to 2030.
Gearing up for continued tightness
Given shifting demographics, advanced economies will need to find ways to grow labor supply and increase productivity in order to maintain their current level of economic growth, and employers and policy makers can help by taking action.
Concerted actions can improve labor supply and productivity and can better match people to jobs.
All labor market stakeholders—employers, market influencers, policy makers, training institutions, and other workforce development organizations—can address labor shortages. Each can act by improving supply, productivity, or matching. Actions employers can take include the following:
- Improve their value proposition for prospective talent and talent they already employ. Prior McKinsey research has found that some of the most sought-after talent values flexibility and meaningful work. Providing flexibility, like hybrid working arrangements or flexible hours, and evaluating performance based on output rather than hours worked allow top talent to create more sustainability in work. Training and career advancement opportunities could attract workers to hard-to-fill occupations typically plagued by vacancies. Indeed, companies that excel at training and internal mobility achieve better talent retention as well as top-tier financial performance and more consistent and resilient performance., McKinsey Global Institute, February 2023. Companies can also double down on retaining talent they already have by, say, improving internal social connections and investing in and developing high-quality managers.
- Seek talent outside traditional hiring pools. Companies should seek talent in broader, more unconventional pools, including by shifting from credentials-based to skills-based hiring. They can offer more flexible work arrangements for parents and seniors contemplating retirement. Employers could also consider looking at often-overlooked groups, like recently incarcerated workers and those with gaps in their résumés, as potential sources of untapped talent.
- Unlock talent in their own organizations through internal mobility. Employers can address skill mismatches by actively shaping career pathways to help employees acquire new skills and by making mobility and rotation a vital part of company strategy. Fostering a culture of collaboration is essential to helping employees discover and build cross-functional skills, with the triple benefits of improved innovation, fewer skill gaps, and higher employee retention.
- Invest in labor-complementing and labor-substituting technology and operations to unlock productivity. Technology adoption can take center stage on company agendas in a tight labor environment, including a full assessment of the potential for augmentation and automation with artificial intelligence and other technologies at the level of specific occupations and work processes. Occupations in administrative support or food services, for instance, have high potential for automation, while healthcare and management occupations have little potential. Companies can then develop short- and long-term strategies to deploy technology and other process improvements to improve the efficiency and attractiveness of jobs that can be enhanced with automation. To capture the full productivity benefit of new technologies, companies also can invest in reskilling, for example through on-the-job training and coaching, creating centers of excellence to better harness skills within their workforces, and identifying skill gaps.
Policy makers and other market-making participants can take the following steps to address tight markets:
- Make it easier for older workers, women, and foreign-born talent to find work. To increase labor force participation among older workers, policy makers can implement more flexible retirement policies that encourage workers to continue working beyond standard retirement ages. They also can design policies to support working parents, such as establishing a minimum leave and improving access to childcare, two policies that have improved female participation in some countries. The supply of workers outside of the developed world remains large, but foreign-born workers can be an immediate and significant source of labor only if properly integrated into the workforce.
- Support the building of human capital across the workforce. Scaling up reskilling programs and improving access to and the capacity of career-oriented schools will help improve the human capital of the workforce. Policy makers can develop incentives to support retraining and other programs needed to facilitate occupational transitions that often accompany continued technological improvement. This approach could be accelerated by artificial intelligence in some countries.
- Reducing labor market barriers to help match job seekers to job openings. Discouraging barriers to employment, like credentialing and non-compete agreements, as well as improving housing affordability in high-productivity, job-rich regions would allow talent to migrate to where it is most needed and most valuable. Universities and workforce development programs can also work hand in glove with employers to help future employees build skills and find the right job opportunities in an ever-evolving labor market.
Tight job markets are challenging for businesses, yet they also present opportunities to improve productivity and livelihoods. Efforts to engage more workers in fulfilling jobs matched to their skills and enriched with new technologies that improve productivity can yield broad-based prosperity and boost economic growth.
