Human Capital & Careers

Labor Costs Will Skyrocket Over the Next Decade

With the talent shortage only expected to worsen, companies will have to pay big bucks to hire and retain top talent.
David McCannJuly 6, 2018
Labor Costs Will Skyrocket Over the Next Decade

Organizations around the world could add more than $2.5 trillion to their annual labor costs within 12 years as a result of the global shortage of highly skilled workers, according to new research from Korn Ferry.

The report follows up on the recruiting and workforce management firm’s forecast in May that the talent shortage could cost companies $8.5 trillion in unrealized annual revenue by 2030.

The United States will face the biggest “wage premium” in 2030, at $531 billion, Korn Ferry says. The term refers to the additional amount employers will need to pay to secure the right talent, above the amount that wages would rise over time due to normal inflation.

But the crisis is not something that’s far off in the future. Even in 2020, the U.S. wage premium is expected to reach $296 billion. By 2025, the gap will total $400 billion, according to the report.

While major economies, including those of Japan and Germany, can expect the highest wage premiums, “smaller markets with limited workforces will feel the most pressure,” the report says.

By 2030, Hong Kong and Singapore — small economies with important financial centers — are expected to experience wage premiums equivalent to about 10% of their respective gross domestic products for 2017.

That means highly skilled workers in those two countries will command an average wage premium in 2030 of $40,500 and $29,100, respectively. The corresponding U.S. figure is expected to be only $8,300.

On a sector-by-sector basis, percentage increases in wage premiums between 2020 and 2030 are forecast to be 169% for technology/media/telecommunications, 161% for financial and business services, and 136% for manufacturing. For the full economy, the figure will be 152%.

But the financial industry may actually face the most dire future.

The industry “is built on skills and knowledge, meaning costs are heavily weighted toward talent,” says Mark Thompson, senior client partner, reward consulting, for Korn Ferry. “It’s an industry where workers already command high salaries, so the additional pressure caused by shortfalls could push some organizations to the brink.”

What can companies do to mitigate the trend? “Employers will need to concentrate on reskilling lower-level workers,” Thompson notes. “That involves identifying those who are adaptable and flexible enough to be successful in the new world of work and putting in place robust training and workforce plans.”

Organizations therefore should resist the urge to shed less-skilled employees as their roles are automated, the report advises.

What may not work very well, despite the growing “gig economy,” is indefinitely expanding the use of freelance and contingent workers. Doing so “makes sense where demand is temporary,” the report says, but “it’s not a sustainable approach to bridging what we believe is an endemic problem.”

Freelance workers are more expensive and even more difficult to retain than permanent team members. The companies that will be able to withstand the coming demand surge will have built skilled-talent pipelines and long-term relationships with their people, according to Korn Ferry.

To arrive at its cost projections, Korn Ferry mapped its talent model against its global pay database, which holds salary data for 24,000 organizations in more than 110 economies. The model assumes that a 1% shortage of talent in a market translates to a 1% wage premium for the available workforce.

“The amount that wages change as a result of fluctuation in labor supply will obviously vary depending on factors such as job type, country, and industry, but a ratio of 1:1 is used as a global average, reflecting the fact that wages tend to rise closely in line with labor shortages,” Korn Ferry explains.