The U.S. today has about 1.2 job openings for every unemployed person, a ratio nearly six times what it was in 2010, when the tightening trend began, and down from 1.9 in the first quarter of 2022, after two years of the pandemic. Across the world's eight largest developed countries -- Australia, Canada, France, Germany, Italy, Japan, the U.K., and the U.S. -- there were roughly 24 million excess workers in 2010. Currently, the number of job seekers roughly only slightly exceeds the number of job vacancies in those countries.
This tightness comes at a cost: New research from the McKinsey Global Institute finds that economies in these countries could have grown by 0.5%-1.5% more in 2023 had companies found enough workers to fill the jobs available.
Nor is it a problem limited to these eight countries. We analyzed 30 advanced economies by comparing job vacancies to numbers of unemployed job seekers, a measure of labor market tightness commonly used by economists. Labor markets have tightened in all of them. 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 U.S.
Advanced economies that have grown thanks to more robust labor supplies thus will need to adjust their strategies. Without efforts to boost productivity and expand workforces via increased participation or immigration, these economies will struggle to reach, let alone exceed, the modest growth rates of the past decade. A lack of people to fill jobs has already forced companies to turn down orders, reduce hours of operation, and take other steps simply because they lack employees to sustain their business.
The degree of labor supply varies at the country level. Labor demand exceeded supply in Germany, Japan, and the U.S. at the end of 2023, while in France and Italy, the supply of unemployed workers exceeding the number of job openings was two million and one million, respectively. Even in those two countries where labor markets are relatively looser, job markets have tightened: At the end of 2023, France and Italy's respective labor supplies were 7.1% and 5.7% higher than their labor demand, down from prepandemic peaks well above 10%.
Which of three big factors -- demographics, productivity, and labor force participation rates -- shaped labor market tightness also varies by country. Population growth, in part due to policies aimed at attracting workers with specific skills and talents, expanded labor supplies fastest in Australia and Canada. Labor supplies also grew in the U.K. and U.S., although more moderately and for different reasons. In Germany, higher participation rates increased the labor supply, while expansion of the labor supply in France was down to a combination of population growth and increased participation. In Japan and Italy, where the impact of aging has been much more pronounced than in other countries, increased participation has allowed for continued modest labor force growth, at least for the time being.
Addressing these contributors to labor shortages is challenging, although there is always a chance of a recession that could shift the balance between labor supply and demand. Aging populations and declining birth rates are extremely hard to reverse absent immigration, which is controversial in many countries.
Nor is it easy to boost productivity, although generative AI and other automation could help with that task. We defined two productivity-growth scenarios, one based on average productivity growth from 1999 to 2007, a period when global productivity grew robustly, and the other based on lower productivity growth from 2012 to 2022 after the 2008 financial crisis. These scenarios suggest that absent productivity acceleration, gross domestic product will increase at a slower pace than even the 2012 to 2022 trend in the eight countries.
Taking steps to increase labor force participation rates is another tool for addressing tight labor markets. Japan, for instance, implemented a set of policies called " womenomics" to encourage more women to join the workforce, and it also has programs to entice older workers to stay at work longer. Germany has adjusted its vaunted training programs to retrain older workers to take new roles. Companies can also encourage more labor force participation by offering more flexible work hours, hybrid working arrangements, and training programs designed to retain and promote existing workers.
Tight job markets pose challenges for businesses. Yet they also offer opportunities to engage more workers in jobs that match their skills and augmented with new technologies. Taking proactive steps beyond the usual business practices to address labor market tightness can not only improve the workplace but also enhance the workforce, supporting sustained economic growth and prosperity.
This article originally appeared in Barron's.