Fantasy Strategic Workfore Planning

A recently published paper from the Boston College Center for Retirement Research on the subject of the "aging workforce" got me thinking about the more general business topic of strategic workforce planning (SWP) and whether or not it has any value.

In "Population Aging, Labor Demand, and the Structure of Wages", Margarita Sapozhnikov and Robert Triest hypothosize that as the workforce ages the relative market value of experience will decline. That is, the wages of older experienced employees will decline as a percentage of wages paid to younger employees. The argument makes intuitive sense, as the supply of older versus younger employees increases, the relative wage advantage will decrease. The researchers test their hypothesis based on historical labor and wage data and find support for it.

What I like about this research is that it rightly assumes that in a free market, the labor market will find a way to reach an equilibrium between supply and demand. Contrast that with much of what is out there on SWP. It assumes that the "war for talent" is a zero sum game with a limited supply and eventual shortages. In reality, there will be no shortage of labor. It may get more expensive but talent will always be available.

I differentiate between two types of SWP. There is the very worthwhile exercise that HR often leads of determining an organization's labor needs in the next year or two and putting together a recruiting or retention plan to help close any anticipated gaps. This kind of SWP is short on process and long on developing short-term actionable steps.

Contrast that process with fantasy SWP or FSWP. In FSWP, a business projects out its need for various types of labor 5-20 years. It also projects out what its internal labor supply will be to support that demand based on assumptions as to retirement and terminations. In theory, it is a great way of identifying longer-term gaps in the workforce assuming business as usual with respect to hiring and retention. All the big-name HR consulting firms provide this type of SWP.

In practice, there are killer problems with this approach. For starters, no one has shown any ability to accurately project business conditions two years down the road - forget 5 or 20 years. Years ago, big business did away with its strategic planning departments for just this reason. While it sounds good ("we are being strategic and thinking long term") to think about workforce demands beyond a year or two is a waste of time.

How about the supply of labor? A business can make assumptions as to future retirements and even terminations and those assumptions may even turn out to be reasonably accurate. But so what? Even if you could make a reasonable guestimate of future labor gaps or surpluses would you really be able to make use of the information today?

If, for example, you were to predict an overall surplus, you might lower your hiring rates and not do too much to retain talent. But is there any real business upside to this approach. After all, if all your assumptions turn out to be true and you indeed have too much talent in the future, you can downsize the surplus. Not an ideal scenario, but from a business perspective, better than to stop hiring today or not make any effort to retain employees in the expectation that you won't need them five or ten years from now. Think of the lost business opportunity if your projection turns out incorrect.

How about if you project a deficit? You can step up your hiring and retention programs which means spending more money on labor in the expectation that you will need them down the road. A more practical approach might be to hire them in the future if you need them.

The objection to this latter approach might be that it is more cost-effective to begin developing the work force of the future now rather than to try and hire into the gaps when they are needed.
Maybe. However, as you are always going to end up paying the current market rate for labor whether you develop it internally or hire it from the outside, why overpay the market now.

All that being said, there may be some current value to understanding the workforce of the future but it goes beyond the HR concerns of hiring, retaining and firing. And any actions you take on that understanding involve a whole lot of risk.

If, you believe in the forecast of overall labor "shortages" and the declining relative value of experience, a reasonable business decision right now would be to make capital investments in plant and automation - the more complex the better and avoid spending a lot of extra money on talent retention.

There is another possibility which would make the above approach a poor long-term decision. As the babyboomer population ages past historical retirement age and wages (and potentially prices) begin to rise, the supply of labor increases to somewhat offset the increase. The extra supply comes from increased immigration, employees delaying retirement, retirees coming back into the workforce and one-worker families deciding to become two-worker families. All of these due to the incentives of higher wages and the disincentives of higher costs.

My view: hold off on the FSWP and bet on equilibrium.