This summer, with every stubbornly high U.S. unemployment rate report comes a slew of headlines and heated debates in the press and across the internet over whether a talent shortage is real or hyperbole. Headlines such as:

The Case of the Missing Skills - New York Times (May 21, 2012)
Employers: Qualified Workers Aren't In Jobs Pool – NPR.com (June 4, 2012)
A Sea of Job-Seekers, but Some Companies Aren't Getting Any Bites - New York Times (June 27, 2012)
Small Firms Seek Skilled Workers but Can't Find Any - Wall Street Journal (July 25, 2012)
Tons of trucking jobs ... that nobody wants – CNNMoney (July 24, 2012)
One of the Fastest-Growing Careers is in Desperate Need of Young Talent – Forbes (August 8, 2012)

“You would think in tough economic times that you would have your pick of people,” CEO Thomas J. Murphy of Ben Venue Laboratories summarizes the conventional business wisdom in Dr. Peter Cappelli’s latest book Why Good People Can’t Find Jobs (June 19, 2012).

But reality is much more complex and a nuisance than the conventional wisdom as real people struggle to survive and thrive in this disheartening economy. Jim Clifton, chairman and CEO of Gallup sees the issue as growing in significance as you factor in the billions of people (billions with a “b”) worldwide seeking “good” jobs.

As Clifton describes in his book The Coming Jobs War, the next world war will not be fought over religious, political or social ideology; it will be a global war for good jobs fought at the city, state and country levels. He fears our leaders are ill-prepared to lead the job creation efforts required to win. This wartime analogy and the lack of a “winning” strategy helps explain the passion felt throughout the media on the topics of employment, jobs and skills.

Skill Shortages – Myth or Reality?

Cappelli’s new book was born out of an October 2011 Wall Street Journal article, “Why Companies Aren’t Getting the Employees They Need”, which received over 400 online comments. The comments ranged from praise such as “First I want to thank the author for this article. Truer words were never put on screen” (Marcus Dion) to the scornful, such as “This was a puff piece. For a professor at Wharton, I would have expected more, even when it is an opinion piece. If I handed this paper in when I was in college, I wouldn’t have received higher than a 'C' ... expect more from the WSJ and certainly from a professor at Wharton” (Steven Hart).

Cappelli systematically addresses employers’ claims that skilled workers are not available or willing and concludes the assertions are false or no worse than in the past. He appropriately concludes that not being willing to pay competitive wages does not constitute a labor shortage and he builds a compelling case that blaming the “victims” is unwarranted and futile at best.

Cappelli’s prescription is organizations need to “drop the idea of finding perfect candidates and look for people who could do the job with a bit of training and practice.” This means revisiting how they utilize recruiting technologies, where they source talent and their training philosophy/budgets. He asserts organizations continuing to look for “unicorns,” specifically “unicorns” that do not command “unicorn” money, will continue to experience a talent shortage largely self-inflicted, which not only hurts their enterprise but the U.S. economy as a whole.

Why there is a Limited Supply of “Talent”

While I admire Cappelli as a thought leader and enjoyed his new book thoroughly, I cannot agree with the overall conclusion that skill shortages are largely a myth and not real. Are they a crutch used by ineffective management teams and weak HR functions – yes. Are they not truly understood by our leaders and policymakers – yes. Not real – no.

In 2006, the Economist published a special report, “The Search for Talent,” which explored the cause and implications of a global war for talent. By the fall of 2008, many were dismissing the expose as another example of HR professionals “crying wolf” similar to the accusations in the 1990s after the dot.com bust. The challenge is recognizing and reacting to a long-term trend while you are living in the middle of it.

The global shortage of talent should not have come as a surprise – it was as predictable as the tide. Even 8% U.S. unemployment, the so-called new normal, was foreseeable. The root cause of the talent shortages and the ongoing “war for talent” is demographics, technology and increased global complexities and integration.

Demographics

As Cappelli points out in his book, employers are complaining about not being able to find experienced workers, affordable workers, and workers with “good” work ethics, skills and maturity. These desired candidates could also be described as employees in their early 30s to mid-40s or born between 1965 and 1981, the notorious “baby bust” in the U.S.

The “baby bust” or Generation X is the 58 million-strong sandwich generation between the 76 million Baby Boomers and 78 million Millennials (born between 1981 and 2001). While there is clear consensus about the size and definition of the Baby Boom, subsequent generations have lacked the same specifications. We define generations not by neat spans of time but by specific historical markers. The Baby Boom starts with the end of WW II and ends with the assassination of President John F. Kennedy. The Baby Bust includes those born after Kennedy’s death through the Iran Hostage Crisis. The Millennial Generation includes those born through the relatively peaceful and prosperous 1980s–1990s until September 11, 2001.

Youth, defined by the Bureau of Labor Statistics as ages 16–24, historically experience high unemployment. These are the years in which young people gain credentials, experience and maturity. Often, what one generation criticizes the younger generation of is merely a symptom of youth, cured by gaining familial responsibility, professional status and wealth.

Before the 1991 recession, economists believed full employment was an unemployment rate of 6% and healthy for long-term economic growth. The U.S. unemployment rate fell below 5% between 1997 and 2001 and, not coincidentally, the Baby Bust was entering their late 20s and early 30s. But even during this historically low unemployment period, unemployment for “youth” not in college ranged between 13.1% and 20.9%. Today (2012) this rate is admittedly a dreadful 33.6%, but with double the overall unemployment, it is in line with historical trends.

Whether the Baby Boomers are able to retire or not does not change the fact they are moving from their peak earning and productivity years, which alone increases the need for “seasoned” workers. This bimodal workforce with an aging population at one extreme and inexperienced workforce at the other creates a skill shortage that can only be cured by time.

Technology

Technology has been a double-edged sword for organizations. While the early benefits of technology clearly favored employers who have been able to boost productivity by replacing expensive, error-prone employees with equipment, machinery and other tools that can run continuously, it is not without cost, and the benefits do not run exclusively one-way.

Technology moves so quickly that gaining academic IT credentials is almost a fool’s errand. The common belief is specific technologies are obsolete within 2–5 years. For the past 25 years, job seekers have been chasing the latest technologies hoping to guess right regarding the next big thing. What employees need is to build a solid foundation that enable them to adopt and apply new technologies. As Cappelli suggests, employers need to provide the necessary time and resources for on-the-job training.

But technology has not only benefited organizations, today individuals have more opportunities for economic independence. As Seth Godin writes in Linchpin: Are you Indispensable?, “today, the means of production equal a laptop computer with Internet connectivity. Three thousand dollars buys a worker an entire factory.” The new reality few are addressing is the most talented individuals enabled by technology are not dependent on organizations for their livelihood. The most talented do not need organizations as much as organizations need talent to drive their growth and value. This paradox causes employers to compete for specific talent and adds to the perception and reality of a talent shortage.

Globalization

One might think the billions of people seeking a good job would solve any talent shortages, and eventually they probably will. But as the Economist article notes, “adding willing hands to the global economy is not the same as adding trained brains.” Globalization has added complexity and new challenges and has actually increased the overall demand for skilled labor without increasing the overall supply (yet).

As Rana Foroohar, Time magazine’s Curious Capitalist, writes in a recent feature “Go Glocal,” “companies with complex global supply chains have not only labor issues to contend with but also natural disasters, high energy costs that make shipping more expensive and risks of corruption.” Managing these risks and assessing all the variables are examples of how globalization increases the demand for more skilled labor and problem solvers.

As emerging economies move toward higher value-added industries, this will continue to drive the demand for skilled labor and not just “willing hands.” According to McKinsey Global Institute, The World at Work reports if current demographic and educational trends continue by 2020, the world will see a shortfall of 38–40 million fewer workers with tertiary education (college or postgraduate degrees) than employers will need. At the same time, there will be an oversupply of low-skilled employees topping 90-95 million would-be workers. These dire predictions ensure the talent shortage debate will continue for years to come.

How your Organization Can Create a Competitive Advantage

Given this economic landscape, what can your business do to thrive and create a competitive advantage? There are three human capital measures we recommend our clients use to maximize their recruiting and retention efforts: Cost of Vacancy, Time in Position and Quality of Hire.

Cost of Vacancy

As Professor Cappelli points out, few organizations understand the cost or value of leaving a position open. We call this measurement “Cost of Vacancy.” In many organizations, leaving positions vacant is a method to balance the budget or boost productivity (in the short term). In reality this strategy is, at best, only shifting costs and, at worst, can have a long-term negative impact on the organization.

Cost of Vacancy is often confused with Cost of Turnover, and while related, it is a distinctively different measure. Cost of Vacancy is the lost productivity or value the role generates on a per day (or other period) basis while Cost of Turnover is a full-loaded cost to replace an incumbent.

Cost of Vacancy is calculated at the position level. The closer the position is to revenue generation the easier it is to calculate. Organizations often struggle calculating Cost of Vacancy because it is based on assumptions, but this challenge should not diminish the value of the measure.

So how does knowing the Cost of Vacancy help an organization? We recommend our clients classify all open requisitions into one of three categories: urgent, necessary and desirable based on their Cost of Vacancy. This process facilitates rationalizing recruiting resources and determining acquisition strategies. We also use the metric as a basis for setting Time to Fill targets. Finally, organizations that have calculated Cost of Vacancy have the additional benefit of improving their job description and their Quality of Hire.

Time in Position

The best offense can be a good defense. Retaining talent, especially those with critical skills, when there is a talent shortage is a sure fire method to gain a competitive advantage – no recruiting expenses, no lost productivity, no risk of a bad hire.

We have found Time in Position is a good predictor of when employees start to look for a new opportunity either within or outside the firm. While there is not a magic number, we have found a good rule of thumb is that between 24 and 36 months employees start to look for new pastures.

Once you calculate your organization retention risk based on Time in Position, there are a number of strategies organizations use to “re-engage” employees including targeted promotions/lateral moves, additional training, special assignments, and other employee development. Organizations that understand and embrace employee development experience lower organizational attrition. Using a Time in Position metric, you can target your organization’s employee development efforts.

Quality of Hire

If your managers are complaining about the length of time it takes to fill a position or the skills of the applicants, then measuring Quality of Hire may help identify the systemic issue and validate the compliant. Quality of Hire answers the question, “are we attracting and selecting better candidates?”

While there is lots of discussion about the need to measure Quality of Hire, few organizations actually do. The reason is quite simple; “quality” by its very nature is subjective. It is not something that can be easily benchmarked and each role within an organization may have a different “quality” standard.

The most common “quality” dimension is tenure but even tenure expectations vary widely depending on the nature of the role. The best quality measures relate to productivity but it is challenging to quantify knowledge worker productivity and cannot be easily compared with operations or sales, for example.

We recommend only measuring Quality of Hire for positions for which there is a known “pain point.” This pain point will help guide the measurement strategy and the follow-up action (if any) required.

Meeting the Challenge

“Modern US companies are extraordinarily sophisticated about virtually all aspects of their supply chain – except when it comes to labor,” Cappelli writes in the last chapter of Why Good People Can’t Get Jobs. Our organizations regularly create complex analyses and make decisions to determine where and from whom to purchase components but we do not apply the same discipline to the labor force. Cappelli condemns the HR function for lacking the sophistication to be able to “identify what is in an employer’s best interest when confronted with these problems” and openly challenges any executive reading his book to “see if you can get an answer” from his/her HR department.

This is your opportunity! Whether you work for a small, medium or large firm, by using Human Capital metrics you can create a competitive advantage for your firm primarily because your competitors are not willing and not able to make the journey. If you would like help getting starting, we encourage you to contact us directly.