Productivity is a huge headache for businesses globally – it is keeping the C-Suite up at night.

A major issue is that advanced economies are experiencing the tightest labor market in the last two decades. That’s according to economic analysis by the McKinsey Global Institute.

The data shows that labor market tightness is particularly acute in the US, Germany, Japan and the Netherlands, and is because the number of job seekers is close to the number of vacancies.

Labor surplus has declined from 24 million in 2010 to 1 million in 2024 in the eight most advanced economies (the US, the UK, Canada, Australia, Japan, Germany, France and Italy).

McKinsey report stated: “What appears to be a perfectly matched labor market is in reality an extremely tight one, since some degree of excess supply is always the norm – matching is never perfect, and demand and supply are always in flux as workers switch jobs and employers shift strategies.”

Not being able to fill vacancies impacts productivity and economic output, according to McKinsey. The consultancy giant estimates that GDP in 2023 could’ve been up to 1.5% higher in the eight most advanced economies if employers had been able to fill their vacancies.

It’s important to remember that trying to fill labor gaps by putting more pressure on existing employees also has a knock-on impact on productivity.

Gallup’s 2024 State of the Workplace Report found that nearly $8.9 trillion (or 9% of GDP) is lost in productivity because of employee disengagement – these workers are burnt out and stressed, which, according to research from PwC, is largely linked to high workloads.

The bad news is that this tightness isn’t going away on all of its own, especially with lower birth rates and older, often retired, people making up a greater share of the population in advanced economies.

But it’s not all doom and gloom, there’s lots of exciting opportunities for employers – and specifically the CHRO and their wider HR team – to step up and fix the labor supply and productivity challenges in major economies.

Think outside the box with tech and talent pools to fix productivity

McKinsey called on employers to turn to emerging technologies, like AI – a switch here has “the potential to deliver more than enough added productivity to keep their economies growing even in a future with a declining labor supply”.

The productivity boost from AI – and specifically the newest iteration, generative AI – could be as high as 50%– but it is important that businesses think carefully about how and where they introduce these new technologies in order to reap the best rewards for them and their employees.

The implementation of AI into companies will require a lot of upskilling and reskilling, and this is a good thing for businesses in general. With insufficient (and declining) access to appropriately skills external candidates, it is time for organizations to look internally.

Employers can address skill mismatches by actively shaping career pathways to help employees acquire new skills and by making mobility and rotation a vital part of company strategy”, noted the McKinsey report.

But successful internal mobility will require mindset shift for organizations, managers and employees. This was a top of conversation at Eightfold’s recent Cultivate Europe event, with HR leaders from Vodafone, Mars, Ubisoft and MM offering their advice to their peers.

Internal mobility will, in turn, also help organizations with their high attrition rates – PwC’s 2024 Hopes & Fears report found that desire to quit is outstripping figures from during the so-called ‘Great Resignation’.

But there’s even more that employers can do to be better at retention.

Ultimately, employees want flexibility. Therefore, calling workers back to the office five-days a week (as Dell, Boots and Barclays have made headlines for doing this year) is unlikely to help employers’ attrition rate, or the wider productivity and labor shortage issues.

Also, according to McKinsey, by offering “more flexible work arrangements for parents and seniors contemplating retirement”, employers can ensure they are tapping into wider talent pools.

It is also time that employers shift “from credentials-based to skills-based hiring”, and starting look at consider often-overlooked groups, whether refugees, veterans or those with large resume gaps.

Employers, and specifically HR teams, now is the time to make a change to fix your long-term productivity woes. Are you ready?