Help Wanted

Five things that are making it more difficult to get advanced economies back to work.

Today, 40 million workers across advanced economies are unemployed. Yet businesses can't fill job openings because they can't find qualified workers. This labor market dysfunction is a manifestation of the rapid evolution of the nature of work and the inability of worker skills -- and labor market institutions -- to keep up with the pace of creative destruction in business. As a result of these changes, many jobs that were lost during the recession may be gone for good -- bad news for the workers who held them and perhaps for the economies in which they live, too. To meet the long-range challenge, wealthy nations will need to find new approaches that go beyond simply stimulating growth.

Here are five trends from the McKinsey Global Institute's latest discussion paper, "Help wanted: The Future of Work in Advanced Economies," that explore the forces shaping which jobs are created, who fills them, where they are located, and what they pay.

1. Technology is changing the nature of work. Over the past three decades, technology has altered how production and routine transaction work is done -- substituting machines for assembly-line workers and ATMs for bank tellers, for example. The next frontier is "interaction work," the fastest-growing employment category, which s includes low-skill jobs that must be done face face-to to-face (such as day-care work), as well as the managers and professionals who are the costliest corporate resources. One shift underway is for companies to disaggregate these jobs into multiple tasks-and reassigning the routine tasks to lower-skill employees, the way a paralegal takes on the routine work of attorneys. This model applies to other professions and to corporate roles, such as human-resources managers, which in many companies has been broken down into subspecialties (benefits administration, compensation, etc.). Jobs today are also becoming more "virtual" -- with broadband connections, cloud computing, and other technology, many interaction jobs can be conducted "anytime, anywhere," making it possible for employers to engage talent (full-time employees or contract workers) on an as-needed basis.

2. The growing skills mismatch. The divergence between the prospects of highly educated workers with advanced skills and those with less education is growing. In the United States, the unemployment rate for college graduates has never topped 5 percent since 2008, while the unemployment rate for high school drop-outs rose to more than 15 percent at its peak in 2009 and 2010. Across OECD countries, the trend is clear: jobs that are being created are increasingly for workers with more education and skills. As a result, many workers are being left behind. By 2020, MGI projects that the United States may be short 1.5 million workers with college or graduate degrees -- and face a surfeit of nearly 6 million workers who have not completed high school. Similarly, France's employers could be looking for 2.2 million more baccalaureate holders than will be available, while that nation will have an oversupply of 2.3 million workers who do not have their "bacs." If this skill mismatch persists, advanced economies will face a growing pool of permanently unemployed.

3. Geography matters. Exacerbating the skilled vs. unskilled problem are geographic mismatches: workers with desired skills are often in short supply where companies are hiring, while places with the highest unemployment may have little job creation. This geographic imbalance is occurring both across national borders and within them. In the United States, while unemployment stands at more than 12 percent in Nevada (which was badly hurt by a massive real estate bubble), only three states away, Nebraska has only 4 percent of the workforce out of a job. And surprisingly, compared with their parents and grandparents, today's working-age Americans are less likely to relocate to find work. Other advanced economies, such as Britain, France, and even Germany, have similarly stark differences in regional levels of growth and employment. Unemployment in southern Europe is almost twice as high as in northern Europe. Within Britain, for example, the unemployment rate is 6 percent in the southeast and 12 percent in the northeast. Policymakers must find new ways to encourage mobility, for instance through tax incentives, such as generous tax deductions for moving expenses incurred in connection with employment. Some companies are creating virtual jobs that allow them to hire people wherever they are located -- gaining access to a broader base of talent and saving on real estate costs in the process.

4. Growing pools of untapped talent. Because of changes in the nature of work and demographics, many advanced economies have growing pools of untapped talent, especially among the young, women, and people approaching retirement age. The growing number of unemployed youth poses a serious long-range challenge. Across the OECD, youth unemployment has risen to nearly 18 percent -- and in some countries it is twice that average. Young people who cannot find work suffer life-long handicaps; their earnings never catch up and they are far more likely to rely on government assistance down the road. Unemployment among Spanish youth has continued to rise since the debt crisis and now stands at close to 50 percent, which could lead to many years of joblessness -- and diminished career opportunities -- for millions of young Spaniards as well as additional costs for a government that is trying to reduce its fiscal deficits. Creating pathways to employment for these young people must be a priority. Raising the labor force participation of women and older workers also presents an opportunity and can help fill the skill gap. Workers older than 55 will be an increasingly important resource in advanced economies. In Europe, where the population is aging rapidly, the potential loss of talent is significant. Advanced economies that can raise the employment rate for older workers -- rather than seeing them pensioned off -- will have an easier time filling the high-skill jobs that will drive growth and productivity. In many countries, women represent an under-utilized labor pool, too. For instance, if Germany raised the labor participation rate of women (currently 53 percent) to Sweden's level (61 percent) it could cut its anticipated shortage of skilled workers by one-third.


5. Disparity in income growth. Trends in job creation are contributing to growing income polarization across advanced economies. Households at the bottom of the distribution have seen little or no income growth in many countries over the last decade, raising questions about aggregate demand, living standards, and social stability. As we have seen, globalization and technology have greatly increased demand for highly skilled workers, pushing up wages for these people and reducing demand for the less-skilled. Other factors are driving growing income disparity as well. One is shifting patterns in family formation: across the OECD, the proportion of single-headed households (single adults with and without children) has risen by 25 percent since the 1980s, limiting the growth of household income. At the same time, marriage rates rise along with educational attainment -- and with high earners more frequently marrying one another, it further widens the income gap. As a result, most advanced economies have seen incomes grow faster for the highest earners than for the lowest.


As a result of these trends, advanced economies face a long-term jobs problem that they will not be able to address adequately with standard solutions. Both policy makers and business leaders will need to find new approaches. Of course, governments will need to continue to encourage overall economic growth -- using fiscal and monetary policy, and removing barriers to business expansion. But restoring aggregate demand alone may not be enough to put all of today's unemployed back to work.

To do so, governments will need to adopt policies and strategies aimed directly at preparing the workforce -- making sure there are bodies and skills ready for the jobs of tomorrow. It's of fundamental importance for national competitiveness. Continuing to improve primary and secondary education and overhauling post-secondary and vocational education for young people who are not headed to college and for mid-career workers who need retraining must be a priority. Relatively simple steps like creating a national jobs database -- to enable students and workers to see what jobs are in demand and what credentials are needed -- would help. In addition, policy makers can unlock growth and job creation by promoting entrepreneurship and innovation, catalyzing investment in infrastructure, and streamlining regulatory approval processes.

Business also has a critical interest in finding solutions to the jobs challenge. In a global economy, companies will continue to seek talent wherever they can find it and at the most attractive cost. But this formula is becoming more complex and simply finding the best-priced labor is no longer always the optimum solution. Companies have rising concerns about supply chain risk -- from natural disasters and other causes -- and are seeing wages rise in coastal China and in India's offshoring capitals.

One strategy is for companies to make talent development a competitive advantage; when the critical resource is talent, companies that can find a steady supply of highly qualified workers and teach them distinctive skills should outperform rivals who can't. This will require stepping up investments in workforce training to levels we have not seen previously. Infosys, the Indian IT services giant, has become one of the top training institutions in the world, capable of putting 14,000 new employees at a time through its 23-week program. This capability has given Infosys a competitive advantage and has helped enable its rapid growth. Companies can also tap into new pools of skilled talent by using technology to bridge the geographic divide -- offering flexible, remote work arrangements to workers they could not hire otherwise. In the coming years, companies that can build up their own supplies of the best trained and motivated workers will win -- and so will the economies in which they operate.

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Failure 2.0

India's big, new foreign policy idea is even worse than its last one. And that's saying something.

Like a pesky ghost that won't be exorcized, Jawaharlal Nehru's nonalignment policy continues to hover over India's foreign relations. Later this month, New Delhi will host its first BRICS summit, an oddball gathering of authoritarian and democratic nations united only by regional heft and implicit opposition to the U.S.-led international order. Just last week, a 70-member trade delegation headed to Tehran to explore fresh opportunities for Indian companies in the Islamic republic, Foreign Secretary Ranjan Mathai having previously declared that the recent, tougher round of EU and U.S. sanctions on Iran were inapplicable to India. Instead of using an ongoing two-year term (2011 to 2013) on the U.N. Security Council to underscore its democratic credentials, India has mostly sided with the Russians and the Chinese in their battles on behalf of Bashar al-Assad and the late Muammar al-Qaddafi.

Does this really sound like the foreign policy of America's new strategic partner, courted by three successive U.S. presidents? Might this relationship -- hailed by Barack Obama as "one of the defining partnerships of the 21st century" -- be long on potential and short on actually fulfilling it?

India's behavior, deeply disappointing to those in the United States who have championed closer ties between the world's largest and most important democracies, reflects an ongoing battle in New Delhi for the soul of Indian foreign policy. On one side you have those for whom a go-it-alone attitude is an end in itself. "Strategic autonomy has been the defining value and continuous goal of India's international policy ever since its inception as a Republic," declares "Nonalignment 2.0," a new report by eight of the country's leading public intellectuals and foreign policy specialists. Nonalignment 1.0, of course, was India's Cold War policy of maintaining equidistance between Moscow and Washington, though in practice it leaned toward the Soviet Union.

Arrayed against this view are those who say nonalignment has outlived its purpose, and seek to strengthen mutually beneficial ties with the West. Former National Security Advisor Brajesh Mishra declared it "impossible" for India to remain nonaligned between the United States and China. According to K. Shankar Bajpai, a former Indian ambassador to the United States and China, "Reviving that concept is all too likely to drive our people back to something that is not only long outdated but -- and this is its dangerous legacy -- which we still fail to recognize as having done us more harm than good."

Who wins this debate has profound consequences for India, Asia, and the world. If India slips back into measuring its independence by its ability to thwart Washington, it risks fatally undermining the argument it made while lobbying for the 2008 civilian nuclear deal -- that the rise of a large, pluralistic, English-speaking democracy in Asia is in the West's interest. Why squander valuable diplomatic capital on an unreliable partner, skeptics in Washington already argue.

If, however, India learns to view foreign policy like most other countries -- in terms of national interest rather than attachment to abstract doctrine -- it will likely come to the conclusion that Washington is a natural partner, with which it shares not only close familial and educational links but also a distrust of China's rapid military build-up and Pakistan's continued dalliance with jihadism. This doesn't mean becoming an American poodle, as New Delhi elites seem to constantly fret about, but recognizing an obvious confluence of interests and values. India's most pressing goal, to modernize its promising but still backward economy, is best achieved in a stable and open international order underpinned by U.S. power. It's in India's self-interest to bolster rather than erode this order, while at the same time working to carve out a larger role for itself.

For now, though, Nehru's ghost continues to cast a shadow over India's foreign policy instincts. Supporters of Nonalignment 2.0 tend to view the United States with as much suspicion as China, despite Beijing's role in boosting Pakistan's missile and nuclear weapons program, its continued claims on Indian territory, and its military humiliation of India in a brief mountain war in 1962. They see the steady decline of U.S. power and India's rapid rise to major power status as inevitable, and conclude that the United States needs India more than India needs the United States. For India's unreconstructed Cold Warriors, America's closest friends in the region -- Japan, South Korea, and Australia -- should be pitied as U.S. lackeys rather than emulated as successful free-market democracies that have brought both security and prosperity to their people.

Nowhere are old habits of mind more evident than in India's Middle East policy. Last March, with Qaddafi's forces besieging rebel strongholds, India joined China, Russia, Brazil, and Germany in abstaining from the Security Council resolution that authorized a no-fly zone to protect civilians. Indian foreign policy pundits spoke of Qaddafi's firm grip on power, his special affection for former Prime Minister Indira Gandhi, and the economic benefits that would flow to India when its steadfast friendship was rewarded. India broke with fellow BRICS on Syria, backing a resolution calling for Assad to step down, but it shares Beijing and Moscow's reluctance to force the Syrian strongman to step down as a precursor to ending violence in his country. As a post-colonial nation, India almost always privileges state sovereignty over human rights. For many Indians, the divide between the West and the East is more palpable than the one between democracies and dictatorships.

One could argue that U.S. leadership in the region has been disappointing: Libya is a mess and Islamist forces are stronger than ever in Egypt, Tunisia, and Yemen. Nonetheless, India's opposition to the United States has been gratuitous. Wedded to the status quo, India missed an opportunity to be on the right side of history. Moreover, with no vital interests at stake in either Libya or Syria -- unlike in the Gulf with its large population of Indian migrant workers -- New Delhi should have gone along with the Western democratic consensus, saving its battles with Washington for when it has real skin in the game.

Iran poses a more serious conundrum. It supplies 11 percent of India's oil imports, its second largest supplier after Saudi Arabia. Iran also looms large in India's conception of its own neighborhood. India relies on Iran for land access to Afghanistan and Central Asia denied to it by Pakistan. New Delhi helped upgrade Chabahar, a minor port in Iranian Baluchistan and has begun to link it with Afghanistan through a web of roads and railways. And, as the United States withdraws troops from Afghanistan, India, and Iran share fears of a Taliban comeback.

Lawmakers in Washington, however, don't see Iran as merely another issue where friends can agree to disagree. An Indian policy that privileges ties with Iran ahead of the U.S.-India relationship misses the forest for the trees, damaging India's long-term global aspirations in the pursuit of short-term regional ones. American lawmakers may have grudgingly seen India's point when it preferred new European fighter jets over older American ones last year, or overlooked the unfairness of India's Parliament passing a nuclear liability bill two years ago that effectively shut out American companies, even though the U.S. had done the heavy lifting to make international nuclear commerce with India possible.

But Iran's apparent pursuit of nuclear weapons is America's most pressing security concern. India could cut back dependence on Iranian oil and demand a greater say in Afghanistan's future in exchange for supporting the United States. Instead, it has so far preferred public posturing over quiet pragmatism. In January, Foreign Minister S. M. Krishna declared India's support for Iran's nuclear power ambitions, albeit not for its alleged nuclear weapons program. The Indian trade delegation hands the mullahs in Tehran a propaganda coup to counter the narrative of their growing economic isolation. Meanwhile, much of the debate in India consists of simply repeating all the reasons Iran remains vital to India's regional calculations. (Though, to be fair, the emergence of Israel as a key security and intelligence partner for India means it has its share of backers as well.)

Opposing U.S. policy strengthens the hand of those in America who argue that India is an unreliable friend. It undercuts those making the case that shared democratic values and common concerns about the rise of an authoritarian China and the dangers of jihadist terrorism bind the two countries together. Japan and Italy, both large consumers of Iranian oil, have grasped the seriousness of the Iran issue. They have cut back on imports and refrained from making provocative statements. Only India appears to believe that it can undermine a core U.S. security concern and still be seen as a benign power worthy of backing at the head table of global affairs.

Despite all this, it's too early for believers in the U.S.-India relationship to despair. Outside the strongholds of New Delhi's leftist intelligentsia and the ruling Congress Party, India has changed dramatically since the advent of economic reforms in 1991. Today's young urban Indians are more likely to recall visits to their city by George W. Bush or Barack Obama than Yasser Arafat or Fidel Castro. Once a heresy, arguments for closer ties between New Delhi and Washington are now commonplace in public discourse. As C. Raja Mohan, India's most prominent strategic thinker, puts it: "As it rises, India has the potential to become a leading member of the ‘political West' and to play a key role in the great political struggles of the next decades."

Moreover, a new generation of ambitious businessmen knows that America underpins the stable and open international order that India needs to fulfill its economic promise. India's generals understand that New Delhi should not go out of its way to stick a finger in China's eye. But they're also aware that India can hardly afford to be sanguine about the rise of a powerful one-party neighboring state with claims on its territory.

All but the most ardent America-bashers have figured out that other countries respect economic achievement more than fictitious bonds of Third World solidarity. For Indian strategic thinkers who view geopolitics through the prism of economics, Japan, South Korea, and Singapore evoke admiration as sophisticated societies that immeasurably bettered the lives of their own citizens in part by maintaining close ties with the world's foremost power. And though America may indeed appear to be in relative decline, anyone with a sense of history knows that many have bet against it bouncing back in the past -- and lost.

Nonetheless, this evolution in Indian thought needs to be speeded up. The sooner India realizes that nonalignment has about as much relevance to the 21st century as Nehruvian economics, and the sooner it begins to root its foreign policy in reality rather than abstraction, the more likely it is to start doing right by its people and its partners.

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