MGI Research

Help wanted: Charting the challenge of tight labor markets in advanced economies

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At a glance

  • Labor markets in advanced economies today are among the tightest in two decades, not merely a pandemic-induced blip but rather a long-term trend that may continue as workforces age.
  • Tightness means forgone economic output. We estimate that GDP in 2023 could have been 0.5 percent to 1.5 percent higher across these economies if employers had been able to fill their excess job vacancies.
  • Companies and economies will need to boost productivity and find new ways to expand the workforce. Otherwise, they will struggle to exceed—or even match—the relatively muted economic growth of the past decade.
  • Actions for companies and policy makers include:
    • Focus on skilling and reskilling, including attracting talent from unconventional pools, offering more flexible work, and internal mobility.
    • Encourage foreign-born workers with programs to properly integrate them into the workforce.
    • Shape retirement policies to encourage people to work beyond standard retirement ages and take steps to attract more women into the workforce, for example, by offering elder or childcare infrastructure.
    • Prioritize investment in labor-complementing and labor-substituting AI and automation to unlock productivity.
A picture of a puzzle with different faces on each pieces, with a missing piece in the middle and another flying off.

Explore labor market tightness in eight countries in depth


Labor market tightness is a persistent challenge. Though loosening somewhat since their 2022 peaks, labor markets in advanced economies remain tighter than at any other time over the past two decades. This is not a pandemic-induced phenomenon. Rather, it continues a long-term trend that started in 2010, when advanced economies began their protracted recovery from the 2008 financial crisis.

Shifting demographic forces could intensify this trend in the future. As workforces age and population growth decelerates, countries cannot count on excess workers to power economic growth. Absent concerted efforts to boost productivity or increases in the workforce through higher participation or immigration, many advanced economies will struggle to exceed—or even match—the relatively muted economic growth of the past decade.

So far, the impact of the labor market squeeze has been unevenly distributed. Job vacancies have climbed most steeply in sectors that traditionally have low productivity, such as healthcare and hospitality, as well as those with stagnant productivity, like construction. Without action, labor shortages may continue to hit sectors that struggle to increase productivity.

Tight job markets present both challenges and opportunities. Job seekers find work more easily and may garner higher wages. Yet upward wage pressure can spur inflation and stress businesses, particularly smaller ones. For instance, companies may need to turn down orders because they can’t hire enough workers to satisfy demand. At the economy level, we estimate that GDP in 2023 could have been 0.5 to 1.5 percent higher in the biggest advanced economies if employers had been able to fill their job vacancies.

Businesses large and small will need strategies to confront persistent labor shortages. Deploying and adopting technologies is one way they can power productivity growth. Retraining programs can help workers gain new skills needed as technologies shift, and matching programs can pair people with jobs. Businesses also can expand their hiring pools, including by seeking to attract immigrants and people who might otherwise sit on the sidelines.

Against this backdrop, this article examines labor markets in advanced economies, using 20 charts to illustrate conditions in labor markets today, future prospects, and actions to address shortages. These labor markets range across 30 economies in Asia, Europe, and North America, with a particular focus on the eight largest: Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.


Tightness is the trend

Today’s tight labor markets reflect longer-term trends in vacancy and unemployment rates across advanced economies.

Since 2010, labor markets have tightened across all 30 advanced economies we analyzed.1 Comparing job vacancies with numbers of unemployed job seekers provides one measure of labor market tightness. The number of job vacancies per unemployed person increased by more than four times on average across these economies between 2010 and 2023, and by almost seven times in the United States.

Labor markets in most advanced economies have been tightening since 2010.
Image description: A line chart plots 30 lines, starting on the left with mostly low up-and-down volatility and rising upward to the right with higher volatility. Each line represents an advanced economy, and the 8 countries featured in the text are highlighted. The vertical axis shows the number of job vacancies per unemployed person, starting at 0 on the bottom and rising to 2.5. The horizontal axis shows years, from 2000 on the left to 2023 on the right. The lines stay below 1 on the vertical axis until about 2015, when many of the lines rise closer to 1, with 8 of them surpassing 1, including the US, Japan, and Germany. Annotations next to the graph note that in aggregate, the job vacancy rate rose by a multiple of 4.2, and the individual multiples for the 8 highlighted countries ranged from 2.3 to 6.7. End of image description

Labor shortages have appeared across a diverse group of countries that have no apparent common features other than their stage of development. Tightness is particularly acute in seven countries—the Czech Republic, Germany, Japan, the Netherlands, Norway, Singapore, and the United States—that have more vacancies than unemployed workers. Together these countries account for 53 percent of the total labor supply of the 30 advanced economies in our research, and 64 percent of collective GDP. In another seven countries, the number of job vacancies is 0.5 to 1.0 times the number of unemployed workers. Australia, Canada, and the United Kingdom are in this group.

But not all large economies have labor shortages. For example, labor markets in France and Italy remain relatively slack, as they do in 14 other countries among the 30. This group collectively accounts for 31 percent of total labor supply and 20 percent of total GDP. Yet even in most of these places, labor markets have tightened. Vacancies per unemployed person have increased by five times in Italy and by almost four times in France.

The tightening trend began after the 2008 financial crisis, when job vacancies were dwarfed by a vast number of unemployed people. The recovery was slow: labor markets in these 30 economies took 8.2 years on average to reach the degree of tightness they had before the crisis.

The desire to hire carried on apace, and labor markets continued to tighten until the COVID-19 pandemic took hold in early 2020. During the pandemic, many labor markets oscillated, first to extreme looseness and then to extreme tightness. Generous fiscal stimulus measures during the crisis fueled a comparatively fast job recovery, and by 2022, labor markets had achieved the highest ratio of job vacancies to unemployed people in two decades. Today, labor markets remain historically tight but have cooled somewhat from that peak. For instance, as of April 2024, the vacancy-to-unemployment ratio in the United States had dropped to 1.2 from 1.4 at the end of the prior year.

Across the eight focus economies, labor markets have retreated from peak tightness during the COVID-19 pandemic toward conditions more similar to the rising prepandemic trend. Only Italy, which had one of the loosest labor markets among developed economies before the pandemic, shows no signs of declining tightness yet. This could be the result of the Italian government’s fiscal response to COVID-19, which the International Monetary Fund estimates exceeded 45 percent of the country’s GDP, making it the most generous relief package among advanced economies.2 Japan, where the labor market was among the tightest before the pandemic, lags its prepandemic trend, in part because a weakening yen increased costs in the import-dependent economy. Nonetheless, job vacancies remain 1.2 times the number of job seekers.

Labor market tightness is returning to trend in many markets after a period of disruption during the COVID-19 pandemic.

Image description:

Eight line charts, 1 for each of the highlighted countries, plot the same data from the previous exhibit, job vacancies per unemployed person, from 2015 to 2023. The lines mostly rise from left to right, with a sudden plunge and recovering rise over the initial pandemic years of 2020–21. Each graph includes a second line that starts in 2019 and rises steadily upward to the right, plotting the continuation of each country’s 2015–19 trend. The first lines plotting the actual post-2019 data mostly show a return to the trend illustrated by the second set of lines.

End of image description

Overall, the appetite to hire continues along a rising trend line, outpacing the number of workers seeking jobs.

Increased labor input drove economic growth in many countries

Increased labor input drove economic growth in many countries
Image description: Eight waterfall-style vertical bar charts show each of the highlighted countries’ compound annual growth rate of GDP over 2010–22, with a vertical axis starting at –0.5% at the bottom and rising to 3%. Each chart shows 2 bar segments — change in growth due to hours worked and change due to productivity — summing to the country’s total. The charts are ordered from left to right according to hours worked, with Australia, US, Canada, UK, and France in one group on the left with an annotation noting they had average GDP growth of 1.9%. The three remaining countries grouped to the right — Germany, Italy, and Japan — have annotations noting that productivity contributed more than hours worked and that their GDP growth averaged 0.7%. End of image description

The excess supply of labor has dwindled

The excess supply of labor has dwindled.

Image description:

Nine area charts, 1 for each of the highlighted countries plus an 8-country aggregate chart, show mostly positive but descending values with some small dips into negative territory in 4 of the charts. The vertical axes show surplus workers in relation to labor demand, going from -4% at the bottom to 15% at the top for the individual country charts and from –5 million to 25 million workers for the aggregate chart. The countries’ horizontal axes show years from 2000 on the left to 2023 on the right. The aggregate chart begins at 2010, starting at about 24 million at the top left and shrinking to 1 million on the right in 2023. The country charts all end in 2023 between –1.5% and 7.1% of demand, each value lower than where the plot started.

End of image description

The labor surplus has fallen from 24 million to 1 million since 2010 in eight advanced economies

GDP could have been higher by 0.5 to 1.5 percent in 2023 if excess vacancies had been fewer

GDP could have been higher by 0.5 to 1.5 percent in 2023 if excess vacancies had been fewer
Image description: A vertical bar chart shows 7 pairs of bars, one for each of the highlighted countries, arranged in descending height from left to right. The vertical scale is the percentage GDP gains in 2023 if employers had filled their job vacancies to historic levels. For each country, the first bar represents if 2023 vacancies matched 2019 levels, with values ranging from 0.3% to 1.1%. The second bar, taller than the first for every country, represents if 2023 vacancies matched 2010–19 median levels, with values ranging from 0.5% to 1.6%. The countries ranked from left to right are: the US, Germany, France, Australia, Italy, Canada, and the UK. End of image description

Who’s feeling the crunch?

Employers in some sectors have felt the impact of the labor shortage more than others, and the appetite for physical and manual skills has unexpectedly intensified.

All sectors have higher job vacancy rates today than in 2010

All sectors have higher job vacancy rates today than in 2010
Image description: A dot plot chart shows horizontal lines with a dot on the left end marking job vacancy rates in 2010, and a dot on the right end showing 2023. The lines are stacked in 12 rows, each representing an occupational sector, and the horizontal axis starts at 0% on the left and goes to to 5% on the right. Rows are arranged from top to bottom by the highest 2023 values, with leisure and hospitality, healthcare, and professional services at the top at about 3.75–4.5%, and government, private education, and mining at the bottom, at 1.5–2.5%. End of image description

Vacancies have not grown in lockstep with employment

Vacancy and unemployment share, 2010-23.

Image description:

A scatterplot graph shows 12 dots, 1 for each occupational sector. The vertical axis shows the 2010–23 change in vacancy share, going from –5 percentage points at the bottom to 5 at the top. The horizontal axis shows the 2010–23 change in employment share, going from –5 points on the left to 5 on the right. The 5 labor-hungry sectors described in the text are in the top-middle of the plot, with almost all positive values. The 3 labor-attracting sectors are in the right-middle, with increasing employment share and mostly decreasing vacancy share. The one labor-disrupting sector, manufacturing, is in the middle-left, with decreasing employment share. And the one labor-efficient sector, trade, is in the bottom left, with shares all decreasing.

End of image description

Sectors struggling with productivity contributed disproportionately to vacancy growth

Sectors struggling with productivity contributed disproportionately to vacancy growth
Image description: A scatterplot graph shows 12 dots, 1 for each occupational sector. The vertical axis shows productivity CAGR for the 7 highlighted countries, going from –2% at the bottom to 5% at the top. The horizontal axis shows productivity output per employee, going from $0 on the left to $225,000 on the right. Highlighted are the half of the dots toward the bottom left of the graph, which indicates lower CAGR and lower output. An annotation notes that these sectors — leisure and hospitality, healthcare, professional services, transportation, construction, and private education — had an increasing share of job vacancies. End of image description

Spotlight: Physical and manual skills in demand

In the United States, occupations with the biggest increases in job vacancies disproportionately require physical and manual skills.
Image description: A horizontal bar chart is organized in 22 rows from highest to lowest value, with two thirds of the bars having positive values extending to the right, and the rest at the bottom with negative values extending to the left. The chart plots the percentage point change in job vacancy share by occupational group. At the top increasing by 1.1 to 2.1 points are food preparation and serving related occupations; installation, maintenance, and repair occupations; and building and grounds cleaning and maintenance occupations. At the bottom decreasing by 1.5 to 3.7 points are computer and mathematical occupations; sales and related occupations; and business and financial operations occupations. Next to the first chart is a horizontal stacked bar chart with an arrow connecting it to the top three bars from the first chart, plotting the distribution of the 5 occupational skills associated with those occupations, which represent a quarter of the US workforce. Physical and manual skills are the largest segment at 66%, indicating that those skills are prevalent in occupations with the largest increase in job vacancy share. Another horizontal stacked bar chart connects to the bars at the bottom of the first chart, representing another quarter of the workforce. Physical and manual skills are the smallest segment at 5%, indicating that those skills are not prevalent in occupations with the greatest decrease in job vacancy share. End of image description
In the United States, wages are growing faster in lower-paid occupations that rely more on physical and manual skills.
Image description: A set of horizontal stacked bar charts is organized into four rows, each representing a quarter of US employment, ranked by average occupational wage, with the lowest earning group at the top. The charts plot the percentage distribution of time spent using the 5 occupational skills, specially highlighting the physical and manual skills segment, which is largest in the top chart at 46% and smallest in the bottom chart at 5%, indicating that these skills are more prevalent in lower-wage occupations. An adjacent table lists the 2015–23 CAGR in average wages for each employment grouping, with the lowest-wage segment increasing the most at 4.5% and the highest-wage segment with 2.9%. End of image description

Growing the supply-side pie

Labor supply has struggled to keep up with overall demand due to shifts in demographics—and that’s unlikely to change, according to projections to 2030.

Higher participation rates mitigated the impact of aging on labor supply

Higher participation rates mitigated the impact of aging on labor supply
Image description: Nine waterfall-style vertical bar charts, 1 for each of the highlighted countries plus an 8-country aggregate chart, show 3 bar segments arranged left to right with positive and negative values representing the 2010–23 CAGR in labor force. Each chart’s net total is positive, with the aggregate chart totaling 0.62% and the country chart totals ranging from 0.3% for Japan and Italy to 1.8% for Australia. The 3 bar segments in each chart include population growth, which is positive for all but Japan and Italy; aging, which is negative in each chart; and participation growth, which is positive in each chart. End of image description

Population growth slowed, despite being buoyed by immigration

Population growth slowed, despite being buoyed by immigration
Image description: Eight waterfall-style vertical bar charts, 1 for each of the highlighted countries, show pairs of bar segments arranged left to right with positive and negative values representing the CAGR in overall population over four chronological periods, from 2010–15 on the left to a UN projection for 2023–30 on the right. The total bars get steadily shorter from left to right across nearly all of the charts, indicating a shrinking population across all 8 countries. The 2 bar segments for each time period include births minus deaths, which are positive for all countries except Japan, Italy, and Germany; and net migration, which are positive across every chart. End of image description

Older workers are an increasing share of populations

Older workers are an increasing share of populations
Image description: Eight sets of vertical stacked bar charts, 1 for each of the highlighted countries, plot the share of the age 15-plus population that is 55 years and older in three different years: 2010, 2023, and a UN projection for 2030. The bars increase in height across each chart, with 2030 totals ranging from 37% in Australia to 52% in Japan. The bar segments split the totals into two age groups: 55–64 and 65-plus, with the 65-plus segments accounting for more than half of the height of nearly all of the bars. End of image description

Older workers fueled growth in the labor supply

Older workers fueled growth in the labor supply
Image description: Eight sets of vertical bar charts, 1 for each of the highlighted countries, plot the labor force participation rate across 4 age cohorts: 15–24, 25–54, 55–64, and 65-plus. Each cohort has three bars, showing the rate across 3 years: 2010, 2023, and a 2030 scenario assuming continued growth at historical rates. The bars increase in height for the 2 older age cohorts across all countries. The bars mostly increase for the younger age cohorts, with some decreases in 4 of the countries. End of image description

Spotlight: Increasing female labor force participation boosted labor supply

Labor supply growth is expected to slow further

Labor supply growth is expected to slow further
Image description: Eight line charts, 1 for each of the highlighted countries, plot labor force growth, with lines mostly sloping upward from left to right and then forking into 2 branches, indicating 2 future projections. The vertical axis is an index going from 75 at the bottom to 110 at the top, with a 100 value equaling the country’s labor force level in 2023. The horizontal axis shows years from 2010 to 2030, with annotations noting that data to the right of 2023 is projected. The forked lines represent stable and growing participation rate scenarios. The growing scenario lines are higher across all countries, exceeding 100 on the right for all countries except Italy and Germany. The stable scenario lines are lower for all countries, with the US, UK, Canada, and Australia lines exceeding 100, and Japan, Italy, Germany, and France dropping below 100. End of image description

Gearing up for continued tightness

Given shifting demographics, advanced economies will need to find ways to grow labor supply and increase productivity in order to maintain their current level of economic growth, and employers and policy makers can help by taking action.

To maintain GDP growth, all countries need additional labor supplies or productivity growth—and some need both

To maintain GDP growth, all countries need additional labor supply or productivity growth—and some need both (1 or 6)
Image description: The first of 6 panels shows 8 vertical bar charts, 1 for each of the highlighted countries. Each chart has 4 bars, mostly increasing in height from left to right, representing different scenarios for GDP growth over 2023–30. The vertical axis is an index going from –150 at the bottom to 325 at the top, with a 100 value representing the country’s 2012–22 average. The first bar on the left is the lowest, representing a scenario in which the labor participation rate remains stable and productivity growth follows the current trend. The second bar is the next tallest for most countries, representing a scenario in which labor participation grows. The third bar is next tallest for most countries, going back to a scenario with stable labor participation but with productivity growth following the pre-2007 trend. The fourth bar is the tallest for all countries, representing a scenario of growing labor participation and pre-2007 productivity. End of image description
To maintain GDP growth, all countries need additional labor supply or productivity growth—and some need both (2 or 6)
Image description: The second of 6 panels shows the same exhibit but highlighting Japan and Australia, the first 2 bar charts on the left. For both countries, 3 of the 4 bars exceed 100, indicating above-average growth in the scenarios involving either growing labor participation or pre-2007 productivity. End of image description
To maintain GDP growth, all countries need additional labor supply or productivity growth—and some need both (3 or 6)
Image description: The third of 6 panels shows the same exhibit but highlighting the next 4 charts from the left: France, UK, US, and Canada. For these countries, 2 of the 4 bars exceed 100, indicating above-average growth in the scenarios with pre-2007 productivity. End of image description
To maintain GDP growth, all countries need additional labor supply or productivity growth—and some need both (4 or 6)
Image description: The fourth of 6 panels shows the same exhibit but highlighting the chart for Germany, where 1 of the 4 bars exceeds 100, indicating above-average growth in the scenario with both growing labor participation and pre-2007 productivity growth. End of image description
To maintain GDP growth, all countries need additional labor supply or productivity growth—and some need both (5 or 6)
Image description: The fifth of 6 panels shows the same exhibit but highlighting the chart for Italy, where none of the bars reaches 100, and two of them extend downward past –125 for the scenarios involving stable labor participation. End of image description
To maintain GDP growth, all countries need additional labor supply or productivity growth—and some need both (6 or 6)
Image description: The last of 6 panels shows the original view same exhibit. End of image description

Concerted actions can improve labor supply and productivity and better match people to jobs.

All labor market stakeholders—employers, market influencers, policy makers, training institutions, and other workforce development organizations—can address labor shortages. Each can act by improving supply, productivity, or matching. Action employers can take include the following:

  • Improve their value proposition for prospective talent and talent they already employ. Prior McKinsey research has found that some of the most sought-after talent values flexibility and meaningful work.3Great attrition’ or ‘great attraction’? The choice is yours,” McKinsey Quarterly, September 8, 2021. Providing flexibility, like hybrid working arrangements or flexible hours, and evaluating performance based on output rather than hours worked allow top talent to create more sustainability in work. Training and career advancement opportunities could attract workers to hard-to-fill occupations typically plagued by vacancies. Indeed, companies that excel at training and internal mobility achieve better talent retention as well as top-tier financial performance and more consistent and resilient performance.4Performance through people: Transforming human capital into competitive advantage, McKinsey Global Institute, February 2023. Companies can also double down on retaining talent they already have by, say, improving internal social connections and investing in and developing high-quality managers.
  • Seek talent outside traditional hiring pools. Companies should seek talent in broader, more unconventional pools, including by shifting from credentials-based to skills-based hiring. They can offer more flexible work arrangements for parents and seniors contemplating retirement. Employers could also consider looking at often-overlooked groups, like recently incarcerated workers and those with gaps in their résumés, as potential sources of untapped talent.
  • Unlock talent in their own organizations through internal mobility. 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. Fostering a culture of collaboration is essential to helping employees discover and build cross-functional skills, with the triple benefits of improved innovation, fewer skill gaps, and higher employee retention.
  • Invest in labor-complementing and labor-substituting technology and operations to unlock productivity. Technology adoption can take center stage on company agendas in a tight labor environment, including a full assessment of the potential for augmentation and automation with artificial intelligence and other technologies at the level of specific occupations and work processes. Occupations in administrative support or food services, for instance, have high potential for automation, while healthcare and management occupations have little potential. Companies can then develop short- and long-term strategies to deploy technology and other process improvements to improve the efficiency and attractiveness of jobs that can be enhanced with automation. To capture the full productivity benefit of new technologies, companies also can invest in reskilling, for example through on-the-job training and coaching, creating centers of excellence to better harness skills within their workforces, and identifying skill gaps.

Policy makers and other market-making participants can take the following steps to address tight markets:

  • Make it easier for older workers, women, and foreign-born talent to find work. To increase labor force participation among older workers, policy makers can implement more flexible retirement policies that encourage workers to continue working beyond standard retirement ages. They also can design policies to support working parents, such as establishing a minimum leave and improving access to childcare, two policies that have improved female participation in some countries. The supply of workers outside of the developed world remains large, but foreign-born workers can be an immediate and significant source of labor only if properly integrated into the workforce.
  • Support the building of human capital across the workforce. Scaling up reskilling programs and improving access to and the capacity of career-oriented schools will help improve the human capital of the workforce. Policy makers can develop incentives to support retraining and other programs needed to facilitate occupational transitions that often accompany continued technological improvement. This approach could be accelerated by artificial intelligence in some countries.
  • Reduce labor market barriers to help match job seekers to job openings. Discouraging barriers to employment, like credentialing and noncompete agreements, as well as improving housing affordability in high-productivity, job-rich regions would allow talent to migrate to where it is most needed and most valuable. Universities and workforce development programs can also work hand in glove with employers to help future employees build skills and find the right job opportunities in an ever-evolving labor market.

Tight job markets are challenging for businesses, yet they also present opportunities to improve productivity and livelihoods. Efforts to engage more workers in fulfilling jobs matched to their skills and enriched with new technologies that improve productivity can yield broad-based prosperity and boost economic growth.