There is no doubt about it: fundamental shifts are taking place in the UK’s labour market. The pandemic has accelerated pre-existing trends, such as automation and digitization, flexible and remote work, and the growing mismatch between employers’ needs and the skills available in the workforce. The most immediate result is the widespread talent shortages felt by organisations up and down the country.
How should businesses respond? In the first instance, leaders are having to react by increasing wages and being more attentive to employees’ demands. However, a more proactive and nuanced talent strategy may be needed to help improve retention and reap the rewards of an engaged, loyal, and skilled workforce.
According to the Bank of England’s long-term statistics, starting in 1948, unfilled vacancies as a proportion of the UK’s total labour force were already elevated pre-pandemic. In 2019, the average vacancy rate was 2.4 percent, compared to the 70-year long-term average (from 1948 to 2018) of 1.5 percent. Such tight labour market conditions reflected record levels of employment as well as increasingly pressing skills mismatches.
Now, two years into the COVID-19 pandemic, labour shortages appear even more acute. Comparing two measures of labour market conditions—the unemployment rate and the vacancy rate—shows that the fourth quarter of 2021 was the first period since detailed records began in 2001 when the vacancy rate—an indicator of labour shortages—overtook the unemployment rate—an indicator of labour surpluses.
This can be seen on the X-axis in Exhibit 1, where the data point for fourth quarter of 2021—in both the left and right panels—is to the right of the Y-axis, essentially the zero point. Unsurprisingly, the relative shortness of labour has been reflected in increased wages, as shown on the Y-axis of the left-hand panel of Exhibit 1.1
What is more remarkable, though, is the rate at which people are leaving their jobs to find new ones. Job-to-job flows—shown on the Y-axis of the right-hand panel of Exhibit 1—reached an all-time-high in the fourth quarter of 2021. In a recent survey, McKinsey’s global research found that the percentage of people who left their job without a new job in hand was around 40 percent. For those still speculating about quitting, the proportion of those who would consider it without a new job offer was even higher, at 60 percent.
The implication of these trends is clear: Employees are re-evaluating their relationships with their employers, and many are not liking what they see. In some cases, work demands have greatly risen due to the pandemic, leading to increasing levels of burnout—itself a trend that pre-dates the pandemic. In others, working arrangements during the pandemic had raised hopes of newfound flexibility—which may now have been dashed. For example, in the United Kingdom, data from the Office for National Statistics shows that in January 2022, fewer than 20 percent of employees in the United Kingdom worked in businesses that intended to use homeworking as an ongoing part of their business model.
Overall, McKinsey research has found a fundamental mismatch between employees’ expectations—and hopes—and employers’ understanding of the situation. Unsurprisingly—in a country where more than 70 percent of people rate their subjective financial situation as “Living comfortably” or “Doing alright”2—workers are reflecting on not just pay, but the entirety of their experience. How they feel about their job is strongly influenced by whether their psychological—rather than just material—needs are fulfilled.
What are those needs? There are many complementary theories, but ultimately it boils down to a few core aspects of thriving as a human being: autonomy, mastery, positive relationships, and purpose.
Having some control over one’s life—and hence both sufficient compensation and some autonomy and flexibility at work—is important. In the United Kingdom, employees in the bottom quintile on job autonomy—stating they had little or no control over various aspects of their role—had an average job satisfaction score of 4.9, on a scale from 1 (Completely dissatisfied) to 7 (Completely satisfied). Workers in the top quintile on autonomy, on the other hand, had a significantly higher average job satisfaction rating of 5.83.
Other needs are important, too. Feeling a sense of progress and mastery—and hence having well-organised work and the right skills for the job—is key to feeling fulfilled. Belonging—being a member of a community—and benefiting from positive relationships is critical. These have been shown to be the biggest drivers of someone’s job satisfaction.
Finally, a sense of purpose and meaning that transcends the everyday seems to support strong engagement and satisfaction at work. And people who find purpose in their work are not only more satisfied, but also more productive than people who don’t.
There are significant differences in workers’ experiences on these dimensions, both between different sectors and occupations, as well as between different organisations within sectors. Exhibit 2 provides one example relating to the level of autonomy individuals have in their jobs. For example, more than 60 percent of employees in information and communication services said they had, on average, “some” influence across five areas of work—job tasks, task order, work pace, job manner, and work hours. In contrast, in transport and storage, only 35 percent of workers experienced the same degree of autonomy.
With inflation and other input costs reaching record levels, this should be good news for employers. After all, it shows that there are many cost-free ways in which they can improve employee satisfaction, increase worker retention, and boost performance. Unfortunately, according to the same “mismatch” research mentioned above, only a minority of businesses are paying attention. When asked why so many people had left, the majority of companies cited compensation or development opportunities as the main explanations. Admittedly, the highest scoring answer was: “They were looking for a better job.” That’s hard to argue with but provides little insight into what businesses should change to stop the outflow of talent.
The consequences from record levels of employee churn will be harmful and costly for organisations. What some might find a little surprising is how challenging business leaders are finding it to respond effectively. Does the instinct to pay people a bit more money take attention away from some of the more fundamental values? Do deeply rooted mindsets stand in the way of taking a more human-centric approach to management and leadership? Or are organisations prioritizing simple—even if less effective—solutions over more complex—and potentially more effective—ones?
Fixing the ‘Great Resignation’ will require work to understand both existing employees’ preferences and those of potential new pools of talent. While the attrition crisis has escalated, my colleagues and I have pulled together a number of “how to” guides with practical actions every organization can consider. These resources may be a place to start:
- Being a good boss isn’t easy—here’s how to get better
- ‘Great Attrition’ or ‘Great Attraction’? The choice is yours
- Purpose: Shifting from why to how
1 Some of the increases in earnings are due to compositional factors, i.e., work shifting to better paid occupations. Because the pandemic disproportionately reduced demand in lower-paying jobs, such as in hospitality and retail, the proportion of higher-paying occupations rose. Therefore, even with no increase in job-specific wages, the workforce-wide average wage would have gone up.
2 Source: McKinsey analysis based on UK Understanding Society survey Wave 11 (2019-2020).
3 Source: McKinsey analysis based on UK Understanding Society survey Wave 10 (2018-2019).