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16 Feb, 2011

U.S. To Face Talent Crunch, Will Need To Relax H-1B Visas, Says McKinsey Study

The U.S. will need to relax its stringent immigration policies, extend the retirement age and get more women into the workforce in order to generate the huge pool of skilled manpower that it will need to boost productivity in an increasingly competitive global economy, according to new research by the McKinsey Global Institute (MGI).

Expanding the “talent pool” is one of seven priorities (see full list of the priorities below) which will be necessary to reignite growth and renewal in the American economy, says the report. MGI, the business and economics research arm of McKinsey & Company, finds that the U.S. “needs to accelerate labor productivity growth to a rate not seen since the 1960s. Further, the U.S. needs to ensure that this productivity growth is broadly based, coming from efficiency gains, innovation, and increasing the value and quality of goods and services produced.”

Says the report, “With the U.S. slowly recovering from recession, government and business leaders face the urgent task of reigniting growth and renewal in the American economy. They need to spur faster GDP growth, create jobs, and reestablish US competitiveness in a rapidly changing global economy. This is not only a short-term challenge; what matters more is the long-term growth pattern over the next several decades. A drop in the rate of GDP growth from its historic 50-year average of 3.3 percent per annum to, say, 1.5 percent for each of the next 20 years would be far more damaging to prosperity and jobs in the U.S. than even a double-dip recession sometime in the next 12 months. To deliver economic prosperity for this generation and the ones that follow, the U.S. needs to retool the economy’s engine so that it can run at a higher, sustainable growth rate for decades to come. The key to achieving this aim is productivity–the engine that has powered US growth in recent decades and been a source of US competitiveness.”

The report says that the US talent pool is not growing fast enough to meet future demand, particularly in the technical and analytic workforce, a situation that could create a drag on future productivity growth. “We estimate that there may be a shortfall of nearly two million technical and analytical workers over the next ten years.”

It says, “For half a century, healthy increases in labor and productivity have together powered growth. The nation’s labor force grew rapidly as the postwar baby-boom generation came of age and women streamed into the workplace. As a result, labor has contributed 1.6 percent to annual GDP growth since 1960. At the same time, productivity rose at an average 1.7 percent annual rate as business processes evolved and new technologies emerged. Together, they contributed to robust annual GDP growth of 3.3 percent in nearly equal proportions.”

Today, the report says, “As baby boomers retire and the female participation rate plateaus, the US economy will receive significantly less lift from increases in the labor force and will therefore have to rely increasingly on productivity gains to fuel growth.” It notes the particularly strong demand that will exist  for analytical and technical occupations such as computer science, mathematics and statistics occupations, engineers, physical scientists and technicians, health care practitioners and technicians.

The report cites the health care sector in which the U.S. faces a projected shortage of several hundred thousand nurses and as many as 100,000 physicians within ten years as well as a challenge in matching supply and demand geographically. In aerospace, the aging of the workforce is having a particularly acute negative impact on available skills: 60 percent of the aerospace workforce is over 45 years old compared with a share of about 40 percent in the economy as a whole.” It adds, “The issue is particularly acute in defense companies that risk losing the knowledge continuity that is key to their industry.”

To alleviate  this situation, the report says that the U.S. will have increase the share of young people, women, and senior citizens in the work force.

This will require removing current barriers to older workers staying in the workforce longer. “Previous work by MGI estimated that increasing the median retirement age by about two years — from 62.6 today to 64.1 by 2015 — could add more than $12 trillion in GDP over the next three decades. Such change is entirely possible given increasing life expectancy and willingness to work longer — 85 percent of US baby boomers think it is at least somewhat likely they will continue to work.”

Significant legal and institutional barriers will also need to be overcome, says the report. “For instance, the burden of insurance costs that climb with age is borne by businesses, and this creates a disincentive to retain and hire older workers. Although Medicare covers retirees aged 65 and over, the program covers little or none of the health care costs of employees at this age if they work for companies providing insurance. Many older workers are willing to work if they can do so part time, work from home, or gradually reduce their hours and pay. Such programs are already widespread in government and educational institutions, but businesses have been reluctant to embrace such approaches due to concern that they might violate federal laws on taxes and pensions or be deemed to be discriminating on the grounds of age.”

It notes that after decades of increase, participation by women in the US labor force appears to have leveled off — and at a lower level than in other developed countries, including Sweden.

The report says that in Sweden, “parental leave benefits depend on previous earnings and day care is for the nearly exclusive use of labor market participants, providing a strong incentive for women to work. The U.S. should consider whether the broader economic gains of higher female participation outweigh the public expenditure that such policies entail. If so, the U.S. should consider removing regulatory disincentives to the participation of women, including the current marriage tax penalty, as well as encouraging the provision of child care, transportation, and remote working to facilitate greater choice for families in how they balance home and work life.

Another action the U.S. might consider is the elimination of barriers to the immigration of skilled workers. Immigrants account for a high percentage of entrepreneurs and technology start-up leaders, and a large share of PhDs from US universities, the report says.

“The U.S. continues to operate a quota-based system, while other developed countries–most recently Australia and the United Kingdom — have adopted a points-based system. The latter system, pioneered by Canada, awards points for desirable qualities such as skill level and sets a minimum number of points for immigrants to meet.

“Governments manage these programs dynamically. Australia, for example, changes the requirements of the system annually to reflect the shifting labor and skills needs of its different regions. Instead of such a system, the U.S. today chooses to make targeted exceptions, for example to encourage the immigration of nurses, who are in short supply. However, this approach leads to extra processing and related delays that a more flexible system would not entail.”

Says the report, “The U.S. should consider increasing H-1B visa quotas, replacing quotas with a points-based system that rewards educational attainment, and easing the path to citizenship for those who are likely to contribute positively to the economy.”

Overall, if the U.S. was to increase the labor force participation of women and seniors, decrease youth unemployment, and increase immigration to the levels achieved elsewhere, it could boost GDP by up to 1 percent over ten years, the report says.

Seven Major Imperatives for Retooling America’s Economic Engine

Source: McKinsey Global Institute

More than ever, the U.S. needs productivity gains to drive growth and competitiveness. As baby boomers retire and the female participation rate plateaus, increases in the labor force will no longer provide the lift to US growth that they once did. New research by the McKinsey Global Institute finds that, to match the GDP growth of the past 20 years and the rising living standards of past generations, the U.S. needs to boost labor productivity growth from 1.7 to 2.3 percent a year. That’s an acceleration of 34 percent to a rate not seen since the 1960s.

This acceleration needs to come both from efficiency gains—reducing inputs for given output—and from increasing the volume and value of outputs for any given input. Since 2000, the largest productivity gains have been in sectors that have seen large employment reductions. Periods such as this have made many Americans suspicious that boosting productivity is a job-destroying exercise. However, MGI finds that, since 1929, every ten-year rolling period except one has recorded increases in both US productivity and employment. It is nevertheless important that the U.S. returns to the more broadly-based productivity growth of the 1990s when strong demand and a shift to products with a higher value per unit helped to create jobs even as productivity was growing.

There is large untapped potential to increase productivity and growth in the U.S., MGI finds. Businesses can achieve three-quarters of the necessary productivity growth acceleration in the current regulatory and business environment. Companies can achieve one-quarter of the acceleration by more widely adopting best practice. Even in such sectors as retail, where US businesses have a strong productivity record, there is scope to do more (e.g., by taking lean practices from the stockroom to the storefront). Aerospace companies may be leading global exporters but they have yet to adopt lean practices in the systematic way seen among best-in-class automotive players. The public sector and regulated sectors such as health care, which have not faced as strong competitive pressure, offer another large opportunity. Health care players have just begun to adopt lean. Hospitals have room to improve how nurses spend their time—at some hospitals, nurses spend less than 40 percent of their time with patients—and to improve their discharge and admissions processes.

Implementing emerging business and technology innovations can achieve a further half of the necessary acceleration. Opportunities lie in enhanced supply chain integration, greater responsiveness to evolving customer preferences and behavior, and innovating in what, and how, goods and services are provided to customers.

To obtain the last one-quarter of the acceleration—and potentially more—government and businesses need to act on economy-wide barriers that today limit productivity growth. MGI sees seven major imperatives:

1. Drive productivity gains in the public and regulated sectors.

Public and regulated sectors such as health care and education represent more than 20 percent of the US economy, but has persistently low productivity growth. McKinsey analysis has demonstrated that, if the US public sector could halve the estimated efficiency gap with similar private sector organizational functions, its productivity would be 5 to 15 percent higher and would generate annual savings of $100 billion to $300 billion.

2. Reinvigorate the innovation economy.

Innovation can increase the quality and quantity of goods and services produced, contributing to productivity gains. The U.S. remains the global leader in R&D spending but others are rapidly catching up. US policy and regulation should provide the right incentives for private companies to continue to invest in innovation and expand their US-based R&D activities. Specifically, the U.S. needs to ensure that the IT infrastructure and technologies are in place to capture fully the transformational potential of existing and new technologies. The potential runs from Big Data—data-driven business decisions and actions—to cloud computing and the application of advances in biology and the life sciences.

3. Develop the US talent pool to match the economy of the future and harness the full capabilities of the US population.

The US talent pool is not growing fast enough to meet future demand. For example, MGI estimates that the U.S. may face a shortfall of almost two million technical and analytical workers and a shortage of several hundred thousand nurses and as many as 100,000 physicians over the next ten years. In aerospace, 60 percent of the workforce is aged over 45 years old compared with 40 percent in the overall economy. The U.S. could alleviate such shortages by removing barriers to older workers staying in the workforce longer (e.g., altering disincentives in how health care costs for older workers are allocated; addressing defined benefit rules); improving incentives to technical and analytical training, for example through innovative funding mechanisms and direct links between jobs and educational institutions); and reducing barriers to the immigration of skilled workers.

4. Build 21st century infrastructure.

US infrastructure is not only inadequate to meet the needs of a dynamic, growing, and productive economy but its quality has been in relative decline. The U.S. today ranks 23rd in the quality of its infrastructure. There is major scope for the U.S. to identify and implement leading-edge practices from project selection to financing and delivery, sometimes through public-private partnerships.

5. Enhance the competitiveness of the US regulatory and business environment.

The relative competitiveness of the US regulatory and business environment is declining at a time when many competitor countries have taken major steps to create favorable conditions in order to attract companies to invest and participate in their economies. The U.S. scores particularly poorly on the burden of government regulation and red tape. The U.S. needs to reduce regulatory complexity, streamline the process of resolving disputes, and eliminate remaining sector-level barriers to more robust competition—learning from the most effective approaches employed elsewhere.

6. Embrace the energy productivity challenge.

Global demand for energy is predicted to rise at an accelerating pace over the next 20 years and focus needs to shift to boosting energy productivity—the level of GDP obtained from each unit of energy consumed. Today, the U.S. lags behind others in this regard, and also risks being left behind in important emerging technologies. Clear long-term policy could encourage the market discipline that drives productivity. For example fuel-economy standards could encourage the adoption of existing energy-saving technologies and spur the development of new ones.

7. Harness regional and local capacities to boost overall US growth and productivity

Cities and regions in the U.S. have markedly different growth and productivity trajectories, and there is insufficient sharing of best practice among them. But there is a rich seam of effective solutions at the federal and local levels that offers scope for shared performance metrics (e.g., a defined set of tracking variables made transparent through technology) and the transfer of best practice. All levels of government should also seek cross-regional alliances in economic development.

The report builds on McKinsey’s industry expertise and two decades of sector-level MGI productivity analysis in more than 20 countries and 28 industrial sectors.

Download the full report free of charge here.

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