Impact of Demographic Changes on the Labor Market

By Alfonso Jiménez, General Manager of Watson Wyatt

24 March 2003

The developed world is facing a challenge from the consequences of demographic change. The author believes we are going to see a demographic shift with heavy repercussions – one that will affect how market strategies are devised and how people in companies are managed.

Some time back, when people talked about future changes, they referred to results of deregulation, financial globalization, technological, social and demographic changes. However, during the 80s and 90s the two latter aspects were almost irrelevant; globalization and technology were the two major motors of change.

Nevertheless, a phenomenon has been taking place in Spain recently that has passed almost unnoticed but is going to condition our society in the 21st century. This is the drastic reduction in the birth rate. For many years in Spain, statistically each woman had approximately three children and the average child-bearing age was 28. This resulted in between 650,000 and 700,000 births a year. New generations of Spaniards, at the age of 16, 18 or 24, joined the active population, basically in the low-qualification group, generating a market with a strong offer. This was the case up until 1978. From that year, and without any clear reason why - or at least an explanation by sociologists and demographists - our population started an unstoppable decline that shrank the number of births to 360,000 in 1998. Spain has gone from having the highest birth-rate in Europe to one of the lowest in the world. This means that every year for the next 20 years fewer young people will be joining the labor market than the year before. Although between 1998 and 2002 the birth rate recovered a little, Spain continues to have a rate of 1.24 children per woman, far from the 2.1 needed to maintain the population.

If this trend continues, the labor market is going to be severely affected, as it represents a reduction of half in just 20 years. Recovery is not expected in that period. Each year there will be fewer workers than the previous one, and so on, year after year. Such a reduction has never been known before.

The people-orientated corporate management currently being implemented in companies will have to change. The labor market is like any other, with its offer (people) and demand (corporate projects). Like all markets, it is regulated by laws of supply and demand. And in all markets, when demand exceeds supply, a price increase results. This is valid for the financial market and the price of money, the commodities markets and, of course, labor, in which labor costs are the price.

One characteristic of this market in recent years has been its excessive offer. There were too many people for the corporate demand to absorb. For many years, Spain has stood out in the rankings of numerous international organizations (IMF, OECD and analysts’ reports) for its high unemployment. Spain had the highest unemployment rate of all developed countries and many wondered how our society could live with this without rioting in the streets. Some offered explanations of a sociological nature to justify the maintenance of such levels and the importance of the family in sustaining the social fabric.

[*D Job creation *]

The job creation that took place in the second half of the 90s, together with the lack of change in the active population, led to a fall in the unemployment rate, which is now at a reasonable level. Although the target of full employment is a social conquest and a recognition of Spain’s economic transition, it contains certain elements that we must be wary of, such as a possible rise in wages. The new labor environment toward which we are heading will generate opportunities but will also bring new threats, such as a more expensive market, with a consequent loss of competitiveness of our companies and the country as a whole.

So far we have enjoyed a market with an abundant offer. However, the fall in the birth rate is going to force us into a situation in which there is going to be a balance between offer and demand. This will require a rewriting of the rules in personnel management, since managing an abundant offer is not the same as managing a scarce commodity. Within this context, a group of professors from universities and business schools, along with professionals, directors and consultants, have been working on a study outlining the consequences at a macro level and for corporate policies, which will have to be heeded if businesses are to be successful in a labor market with a reduced offer.

Some of these reflections refer to the need to increase the active population through planning of adequate immigration policies, repatriation of Spaniards living abroad, full incorporation of women in the labor market, identification of groups in enforced inactivity and their transfer to the active worker group, deferment of the retirement age, and other solutions.

Other measures of a corporate nature are determined by the need to transform policies that were valid in an environment marked by a large offer, in which cost was the only factor affecting decisions, in favor of a model in which the capacity to attract and retain the best of the market at an adequate cost will be the key to success. In this new environment to which we are inexorably being drawn, the best will always be able to choose between their current situation and numerous corporate options.

Consequently, personnel management policies will have to undergo major transformations if companies are to compete, as corporate projects will not only be fighting for funds and customers, but will also have to attract the best employees - a commodity that will become increasingly scarce.

Each year over the next two decades fewer Spaniards will join the labor market than the previous year, until those born in 1998 reach working age. That is, between 2014 for unqualified workers and 2021 for qualified workers. At that point there will be a change in the trend, with a slight upturn, though this will by no means be a major turnaround. Thus, if today a director is 40 years old, he or she needs to know that human resources will grow rarer each year, and that his or her entire professional career, as from today, will be marked by this ‘curse’ of biblical proportions.

There is one other point. Based on market laws, it is more important to acquire and maintain a scarce resource than one in abundance. A scarce resource is not only more expensive, it is the only one that also has the capacity to take decisions and is free to choose. Within this new context, and in a way more obvious than ever, people are a company’s main asset. This is any firm’s main competitive advantage, and the factor to be taken into consideration when doing business.



** This article marks the start of a series based on ideas set out in the study España 2010, mercado laboral (Spain 2010, the labour market) by A. Jiménez, M. Pimentel and M. Echeverria, published by Díaz de Santos, 2002.

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