Workforce Shortages as a Future Risk

Recent workforce shortages began with a fundamental shift - accelerated by the pandemic - in how and where people work. But that was only one factor: workforce shortages have evolved in response to economic, social and technological developments, including artificial intelligence (AI), social expectations and recent regulatory changes.

Increasing recognition of workforce and skills shortages as a major business risk is reflected in Aon’s most recent Global Risk Management Survey, in which respondents identified the issue as their number twelve risk— its highest ranking in the history of the survey. 

Globally, respondents ranked workforce shortages as their number eight future risk, and for several industries it ranked even higher among their top 10 future risks: healthcare (number two); transportation and logistics (number three); construction and real estate (number six); hospitality, travel and leisure (number six); and professional services (number seven).¹

Workforce shortages have far-reaching implications on the ability of businesses to innovate and compete, ensure regulatory compliance, and prevent cyberattacks and disruptions in supply chains and operations, thus exposing businesses to reputational risk.

What recent technological, economic, political, and social factors are shaping workforce shortages?

Generative AI

The use of generative AI, that is artificial intelligence that can create new content and responses based on user prompts – often seen in chatbots and virtual assistants, has expanded exponentially in the months since our survey was released. Conversations around generative AI’s ascendance have been heated, particularly those that center on the potential displacement of workers: for example, a poll of 2,000 executives released in April 2024 showed 41 percent expected “AI would reduce the size of their workforces within five years”.² 

The changes generative AI could bring to current jobs has also been a hot topic. In March 2023 Goldman Sachs released a report indicating that two-thirds of jobs in the US and Europe would be automated to some extent by generative AI.³ Nonetheless, like similar reports on generative AI’s potential workforce impacts, Goldman Sachs predicts that ultimately the technology will boost productivity and create new jobs.

Indeed, AI in all its forms will continue to alter the job landscape in some sectors—including HR, which is using the technology to realize new capabilities in areas such as talent acquisition, people analytics, and learning and development. The particular impact on HR is reflected in Aon’s survey: respondents in HR roles identified both workforce shortages and AI among their top 10 future risks, ranking them at number three and number eight, respectively. 

While the use of generative AI carries potential risks, including exposure of private and confidential customer, client, patient and proprietary business data, it can also help address workforce shortages. In fact, recent studies have shown that having access to an AI assistant can boost workers’ productivity and enhance the capabilities and advancement potential of workers who have ranked lowest on performance metrics.⁴

At the same time, the proliferation of generative AI applications within non-technology company settings has heightened some workforce shortages, as demand far outpaces the supply of research scientists, engineers and others with the specialized skills needed to bring those applications to life.

Pay transparency

The recent movement toward pay transparency, such as the EU’s Pay Transparency Directive (passed into law in 2023), can potentially help to ease workforce shortages. Closing the gender pay gap and improving fairness and diversity can enhance trust and loyalty between employers and employees, for example. 

Additionally, by helping to identify and address company culture issues related to bias or a sense of unfairness, regulating pay equity can boost employers’ attractiveness to potential and current employees. 

But for employers, pay transparency regulation has prompted concerns over potential wage inflation, intensified talent wars and possible legal action which could potentially exacerbate workforce shortages. At a practical level, companies must also navigate how to measure the value of work to comply with the EU directive’s requirement for equal pay for work of equal value.

Shifting workforce expectations and demographics

Work-life balance, flexibility in scheduling, hybrid working, and corporate cultures that promote employee wellbeing have become paramount considerations for workers alongside fair pay, a top priority amid ongoing inflation. 

While workers of all ages have shifted their expectations, concerns about culture, flexibility and wellbeing are most pronounced among younger worker demographics, including Millennials, who comprise about 40 percent of the current workforce, and Gen Z workers (those born after 1996), who will make up about 30 percent of the U.S. workforce by 2030.⁵

Of even greater concern is that as the global population continues to skew older, especially in Europe, the U.S., and Japan, population growth remains slow or stagnant.⁶ Despite more workers past retirement age remaining in the workforce today, the pool of working age adults is predicted to decline sharply by 2050.

How can organizations address workforce shortages and risks associated with them?

Employee value proposition (EVP)

As unemployment levels remain low and career options expand, employers must continually improve their employee value proposition, even for entry-level roles. 

Alongside pay, workers take into consideration the total rewards package: salary, bonuses, healthcare and retirement benefits, as well as work-life balance, flexibility, and corporate cultures that prioritize environmental, social and governance (ESG) goals, employee wellbeing, and diversity, equity, and inclusion (DEI). 

Demonstrating a clear path of career advancement is also vital, particularly for highly skilled workers. In addition to competitive compensation, engineers, data scientists and others in leading-edge, rapidly growing fields seek roles that offer an upward trajectory, working on the latest technology using the latest tools and techniques, surrounded by others who can help them learn and expand their skills.

Workforce planning

Many companies face shortages of experienced workers, which are among the most difficult to address via external hiring. In manufacturing as well as in certain engineering sectors and financial services, an effective employee is one with several years of experience. In manufacturing, historic underinvestment in building a pipeline of skilled workers, means that the median age may be fifty or above for employees in specialized roles.  New hires simply cannot be plugged into highly specialized jobs, so companies need a plan to help younger workers to move into those roles over time. 

Enter workforce planning.

While traditional workforce planning has focused on job roles, companies now need to focus on job skills as they consider their business goals. Companies must quantify what they have in terms of in-house skills and compare that to what they think they might need in the future. This quantification and assessment help inform workforce strategies such as whether to outsource, partner with or acquire another company or focus on hiring in a particular area to help close an identified skills gap.

When it comes to offering equal pay for work of equal value, employers have to ascertain what work of equal value means, and that requires the use of a consistent methodology to measure the value of the work that people in their organization do. Fortunately, that is what job architectures and job leveling systems are designed to do.

A job architecture defines what job an individual does so that employers can determine how that relates to jobs that others do within the organization. A job leveling system provides a means of the comparing jobs in terms of the value that they create, their complexity, the skills and effort required to do the work, and the conditions in which the work is done. If, for example, a job requires an employee to work outdoors in varying weather conditions, compensation could reflect the impact on an employee relative to someone who works indoors in a climate-controlled environment.

Embracing AI—strategically 

Non-tech companies that need to compete with tech companies to attract and retain specialized talent to devise new AI solutions and products can offer prospective employees the opportunity to experiment with AI and pioneer capabilities that can transform an industry, versus being just one of many individuals working on the same applications at a tech company.

One of the main concerns for non-tech companies considering deploying AI in the workplace is that they are not comfortable from a risk perspective. However, companies can reduce their AI-related risks considerably with a combination of legal frameworks and risk management to remain safe while finding ways to embrace and encourage experimentation to take advantage of this technology and position themselves to lead in the new AI environment.

In summary, shoring up workforce gaps and recruiting and retaining top talent in an increasingly competitive landscape are daunting endeavors for any company. Nonetheless, there are powerful tools that employers can deploy to address current shortages, stay ahead of shifting employee expectations, ensure compliance with new regulations and bolster innovation and competitiveness.

1 How critical respondents feel this risk will be in three years’ time.
2 https://www.adeccogroup.com/our-group/media/press-releases/leading-through-the-great-disruption-2024
3 https://www.gspublishing.com/content/research/en/reports/2023/03/27/d64e052b-0f6e-45d7-967b-d7be35fabd16.html
4 24-013_d9b45b68-9e74-42d6-a1c6-c72fb70c7282.pdf (hbs.edu)
5 https://www.nytimes.com/2023/11/17/business/economy/tiktok-biden-economy.html; https://imagine.jhu.edu/blog/2023/04/18/gen-z-in-the-workplace-how-should-companies-adapt
6 https://www.nytimes.com/interactive/2023/07/16/world/world-demographics.html; https://www.ib.barclays/our-insights/the-demographic-trends-pointing-to-structural-issues-in-labour-supply.html
7 https://www.shrm.org/topics-tools/news/talent-acquisition/heres-how-manufacturers-are-growing-their-talent-pipeline; https://weldingworkforcedata.com/

General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent, or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss caused by reliance on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.