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The changing workforce - and its tug on your bottom line.

The changing workforce--and its tug on your bottom line What are the most important, the most fundamental changes occurring in our economy today, and what do they mean? What implications do these changes have for today's policies and for today's managers? These are the kinds of questions that we at the Hudson Institute try to answer. We focus on the trends that are shaping the business environment in the 1990s.

Demographics is the one thing that is very certain about the next decade. We know a great deal about the way in which our society will change, our workforce will grow. We know a lot about who's going to be in that workforce. But what will be the five most influential happenings in terms of the financial arena?

Slowed population growth

At the most basic level is a slowdown in the pace at which our country's population--and thus its workforce--is growing. By the year 2000, the workforce will be growing at a rate of less than 1 percent a year, as opposed to almost 3 percent in many years during the '60s and '70s. And, of course, the trend is already being felt dramatically in some industries.

The reason for this? It's combination of two things. One is that the baby boom has been followed by a baby bust, and therefore we have fewer young people coming into the workforce. The other is that the rate at which women will enter the workforce will slow, simply because such large proportions of women already are at work and there's less room for that group to grow.

What does all this mean for the economy and society? It constrains our capacity to grow, because we're used to thinking that a 3-percent-per-year growth rate is our birthright. We've built our fiscal and monetary policies around that rate. And if a company's worksforce is growing 2 or 3 percent each year, it has to gain very little in productivity to realize a 3-percent business growth. But if the workforce is growing at only 1 percent a year, then a 3-percent business gfrowth arequires enormous productivity improvements, much greater than any we've seen in the last 15 years.

We're going to see repeatedly, I think, during the '90s the sort of behavior we've seen recently from the Federal Reserve, where even with growth bumping along below 3 percent the brakes are put on. And the targets of 3 percent may be revised down to 2.5 percent a year, which isn't particularly threatening but, again, it constrains our growth rate.

We'll jalso see a real shift in the structure of our economy. We'll move away from a population-dependent growth to growth based on selling to those who have money. That is, rather than selling one widget to every household in a fast-growing population, we'll shift to upscale, service-type products and sell them to the upper-income population segments.

And, of course, as labor markets become much tighter, the balance of power between employers and employees will shift in favor of the worker because employers will be hungrier for talent.

Aging workers

Second, we're facing a rapidly middle-aging society, going from a predominantly young workforce, mostly under 35, to one that is predominantly 35 to 54--not yet hitting the big retirement crunch o the next century but looking at an absolute decline in the number of young people. Indeed, a decline, in absolute numbers, of several million through the mid 1990s.

Does it really matter if the workforce is 35 or 45? It certainly does. On the positive side, these people are already educated, they're more reliable, they show up for work, and they don't quit so often. These are things that could improve productivity.

Also, because, on average, people are borrowers funtil about age 35 and then they become savers in their 40s and 50s, we may see improvements in personal savings. And we're obviously a society that has a real problem increasing our personal savings rate. Economists, however, are very divided on how this tendency jwill change business.

Then there are the not-so-good things about a middle-aged workforce. Middle-aged people are more set in their ways. They move less frequently, change jobs or occupations less frequently, and undergo training to acquire new skills less frequently than they did in their 20s.

Look at the history of business in the last 15 years. Think about the companies that have changed the nature of their industries. You'll always find thousands of young people competing against thousands of middle-aged people. In 1980, AT&T had an average age of 44. MCI had an average age of 28.

These things can affect the growth of companies, the dynamics of industries, the entire competitive environment. Youth has a definite value to certain kinds of employers, especially those in rapidly changing markets such as the financial services industry.

The female factor

Third, women continue to enter the work-force at an accelerated rate. The percentage of women at work will rise to around 60 percent by the year 2000. While this trend has been well discussed, one piece of it is relatively new: the number of women who work when they have very young children. As recently as 1975, fewer than one-third of women with children under the age of one were in the workfofrce. Now, that number is over one-half. So it has become the norm for women in virtually every family circumstance and every age bracket fto work.

The problem is that society has not yet come to terms with a world in which most women are working. When you think about the structure of work, the structure of social security or pension programs, public tax policies, and work hours, we have only begun to make adjustments. For instance, we're just beginning to debate such issues as providing care for young children. The bills that are moving through Congress are the first, not the last, round of that debate.

We know that the quality of care matters to the children's future, and that for the most part women are not returning to the home to provide that care. But it is a fantastically expensive benefit. Who will provide it, and who will pay for it?

Structurally, the issues of adjusting to the new reality of working women is just at the beginning. We are more and more emphasizing convenience, getting things done quickly, and providing services efficiently. And we'll see a proliferation of convenience services even greater than what we've seen so far.

Regional differences

What will this mean regionally? Think about how different the various labor markets are becoming based on who's growing and who's not.

The growth winners will be the west coast; the southeast coast, from Maryland to Florida; and the area that includes Texas, New Mexico, Arizona, and Colorado.

The losers will be the Great Lake states; the southwest central states, running from South Dakota to Mississippi diagonally across the country; the band of states in the middle of the country; and the northeast coastal states.

If some of these projections seem a little off, consider what is driving the changes in regional growth: immigration and Federal taxing and spending.

Immigrants and their children will make up about one-third of all the net additions to the country in the next 15 years. And immigrants don't settle randomly across the country. They overwhelmingly locate in areas where their friends' families have located previously. Asian and Hispanic immigrants, for instance, who make up the great majority of immigrants to this country, have been settling in Florida, Texas, Arizona, and southern California. And they most likely will continue to do so.

From the viewpoints of population growth and economic growth, immigration is a powerful boon to the country and a very powerful stimulus to local economies.

The other big impact on regional growth patterns comes from Washington. When Washington spends money, it's not a neutral process regionally. If you look at the budget, the big allocations are for defense and the elderly. That money is not distributed evenly across the country. Defense spending, of course, is concentrated where the bases are and near the high-tech military contractors. That tends to follow a "U" shape around the bottom of the country, reenforcing growth in these areas.

Social security spending, on the other hand, follows people wherever they retire. And, while they retire all over the country, much greater numbers head for Florida, Arizona, and California. This is an enormous engine of growth. Every year, the state of Florida, for example, gets a cash bonus from the rest of the country of about $8 billion. That's the difference between the checks that Florida's employers mail to Washington to pay for social security witholding and the checks that Washington mails to Florida to pay people who are retired.

Now, that money drives retailing, pays for government, and creates construction. It's far more powerful than any economic development effort. Those personal decisions of retirees can create a growth dynamic that attracts young people to take jobs in the service industries that are growing to meet the new demand. And this movement has very uneven effects across the country, like taking money away from some of teh northeastern regions in particular and transferring it southward.

Another important implication of the uneven population movement comes from the change in the number of young people. Although, as I said, the number of young people is going down, that's not true in every place in the country. In California, Arizona, and several other areas in the west and the south, there will be either small gains or very small declines in the numbers. Meanwhile, states like Ohio, New Jersey, and New York will see enormous declines, as much as 25 percent in some cases, in the number of 18- to 24-year-olds in the workforce. So employers who hire from that pool, particularly those with high turnover, will face a tremendously challenging environment in the '90s in some parts of the country.

A new "average" worker

Just who is coming into this workforce? We broke the workforce of the year 2000 into two components: all the people who were in the workforce in 1985 and all the net additions, or the people who joined the workforce since 1985 minus the people who retired from it.

The difference in the two components can be explained rather simply. White men born in the U.S. compose just under half of today's workforce, about 47 percent. And yet they will make up only 15 percent of all the net additions. The majority of the net additions will be women, minorities, immigrants, and combinations of these categories. Thus, from the point of view of employers, particularly those who are continuing to clone themselves in the white male image, the demographics won't work. There will be dramatic differences between new hires and the people who are already in the workforce.

One significant difference will be in the quality of people. Immigrants often will face language barriers, and minorities may suffer because they received an education that is very often poor compared to that of majorities.

An example of this can be found in the results of a test administered to 18- to 24-year-olds to judge their ability to balance a checkbook. The test called for the addition and subtraction of four-digit numbers. Not only were the scores alarmingly poor overall, but there were tremendous gaps between the competence of minorities and whites.

Given this information, we tried to determine the skill mix needed for new jobs. In other words, are we creating an economy for dummies, or are we creating a higher and higher skill economy?

Comparing all of the existing jobs to all of the new jobs that could be added to our economy throughout the '90s, we discovered a striking pattern. We're creating twice as many jobs in the highest skill categories and half as many jobs in the lowest skill categories. Even in the middle, where most jobs continue to be, the average skill requirements are rising.

What are we doing

about the problems?

We already can see how employers are responding to these workforce problems. And these responses are going to become much more intense in the '90s. The first and simplest response has been, "We'll get ours. We'll bid up the wage."

You can see it in Boston. McDonald's and Hardee's pay $6 or $7 an hour to entry-level workers to get the quality they want. You can see it in the bidding wars for nurses. It's not unusual for hospitals to pay thousands of dollars or give weeks of vacation for a nurse referral. You can see it wherever there is high turnover, wherever women have been relied on for staffing, wherever relatively high-skilled workers are the norm. Companies are bidding up wages.

Some employers take an opposite approach. They figure if the quality is not there, they'll provide it--through remedial training. American Express, for instance, created its own school system within the school system. Aetna developed an entire institution to provide training to young people coming out of high school to upgrade their qualifications. If the school system can't do it, these companies say, they'll do it. It's very expensive solution, but one that is increasingly on the minds of bigger organizations that do a lot of hiring in this environment.

Now, we're seeing a new attitude toward recruitement that is reaching further down the age scale. It's not terribly surprising when the U.S. Army, the granddaddy of all recruiters, sends out recruiters to encourage high school freshmen to stay in school and consider a future in the Army. But I've heard that Hartford Insurance also is doing some early recruiting. The company sends out people to advise sixth graders on the type of math they ought to study to have a real career.

The whole notion of where companies are going to find workers in the future and how they will deal this shortage has begun to change the idea of recruitement. It's no longer just, "We'll send somebody over to the local college or the local high school when the kids are graduating." It's a much more intense, competitive environment.

And we're seeing dramatic changes in the way people are being treated. Industries are changing the way they do business in rder to hang on to particular people. IBM, for instance, offers such "high-end" benefits as a day-care referral service and a leave plan that lets employees take off years to raise children and return to their jobs without a loss of seniority. Those sorts of changes are being driven, at least in part, by these demographics.

We often see even more fundamental changes with employers of entry-level workers. Take the trucking industry, for example. It's no longer an attractive occupation to be a driver, and the turnover rate in many companies is enormous. One Maryland firm found that its annual turnover rate had reached 100 percent among drivers and that, as the general driver attitude declined, the competence of the workforce declined. The company's executives decided to do something about it. They interviewed the drivers who had left, asking them why they quit. One of the biggest beefs, they found, was the way they were treated by the dispatchers. Well, the company issued an edict: The dispatchers will treat the drivers nice. Nothing happened. So the chief executive issued another edict: The dispatchers will praise the drivers. Nothing happened. He issued another edict: The dispatchers will keep a log, and the log will state that the dispatchers have praised the drivers four time on these dates and at the times listed and they will synopsize what they talked about.

A pretty Mickey-Mouse scheme, right? Well, the outcome was that many of the dispatchers felt the approach was really stupid, so they quit. But last year the turnover rate at this particular company dropped below one-half of a percent.

Many companies are responding to this labor shortage by reaching in to different parts of the workforce and recruiting people they did not historically recruit. The best example of this is McDonald's, whose executives believe, with some justification, that they are the best at recruiting older workers, at integrating them into the company's teams, and at dealing with their different schedule needs. Why? Because these executives have changed the perception of what affirmative action is all about. To them, it's a business advantage more than satisfaction of some government mandate.

Finally, a strategy that many employers are adopting calls for getting more out of workers by adding to their tools. This is a very traditional approach in manufacturing. For example, the amount of capital-to-worker ratio in manufacturing might be $100,000 of tools for each worker. What's different about the '90s is that service industries are much more likely to adopt the strategy.

The problem is that very little has been done to add capital to service businesses. Take retailing, for example, where the average clerk uses a relatively limited array of tools to become more productive. Employers are beginning to experiment with how they may automate service businesses. And I think the area of financial services is likely to be one in which this process becomes well advanced. Of course, automated teller machines are just the beginning of that. But in every imaginable financial transaction, the substitution of information tools for what has historically been a labor-intensive business is likely to accelerate.

Bending the rules

All of the strategies for coping with the labor conditions of the 1990s share a trait: they're all expensive. And no single strategy can solve every problem. A mix of responses is essential to deal with the demographic and economic realities of the 1990s. The finance industry surely will not be insulated from that.

One way to think about the impact on your company is what I call "managing with the doors locked." Suppose you had to take the people in your organization and adapt to every change in the market, you had to deal with the environment of the '90s without a single new hire, you had to take the people inside the building and get them to behave differently in response to new things. That is quite a challenge. We talk about changing the corporate culture--educating, upgrading, and retraining our workers. But we don't do any of it. In the '90s, it's going to be a much more urgent task.

Or look at it this way. Suppose you could hire anybody you want and as many workers as you want. But they're all different from the people you have at work today. They speak different languages. They have different values, different cultural attitudes, different work habits. They're different sexes compared to the people who are with you today.

Think about what that would mean about the way you manage your organization. I think it will mean that the way we treat people, the way we reward them, the way we structure their benefits and their work hours--every one of the rules that we apply today--will be bent in some way.

Mr. Johnston is project director of the Hudson Institute's "Workforce 2000" study and author of the book by the same name. His message here has been edited from a speech be delivered at FEI's annual conference.

William B. Johnston Vice President for Special Projects Hudson Institute
COPYRIGHT 1990 Financial Executives International
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Author:Johnston, William B.
Publication:Financial Executive
Date:Mar 1, 1990
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