Studies show we’re going to have the biggest labor crisis in history in the next few years. We believe the best way to handle it is to start improving labor efficiency. In this article, we are going to dive deeper into this and explain how companies can use data to improve labor efficiency.
Short Economics/History Lesson
The last 80 years of economic life witnessed a dramatic increase in the supply of labor. Demand remained mostly constant. We know from economics that whenever supply of something (like ice cream, shoes, or labor) goes up and demand stays the same, prices tend to go down. It follows then that the increase in labor supply causes labor prices to drop. In fact, 2022 was the year in which labor in the US was the cheapest it ever was. Here are 3 reasons why labor supply increased over the years:
3 reasons why labor is cheapest it’s ever been
The labor force has seen a dramatic increase in the supply of labor participants over the last 80 years due to three following factors:
- The rise of Baby Boomers – the baby boom period in the US was a sharp rise in birth rates that began right after WWII in 1945 and lasted until 1965. Baby boomers started entering the workforce in the early 60s and by mid 80s approximately 70 million baby boomers actively participated in the labor force.
2. Women entering the workforce – In the period from 1960s to 1990s women joined the workforce en masse and stayed, which doubled the workforce in theory.
3. The rest of the World joined the party – In the period from 1980s-2000s as communism started to lose its footing, countries such as China, Russia, Eastern Europe and the rest of the globalized World expanded its labor into the free marketplace. This again doubled the workforce in theory.
All this, combined with telecommunications and infrastructure improvements, added to the overall productive workforce. The increase in labor supply caused labor prices to go down.
To illustrate the point of labor prices decreasing, I’ve done research into the earnings of my own family members. My grandfather worked as a small town attorney in the 80s while my grandmother was a stay at home mom. I took my grandfather’s income, weighted it for inflation and compared it to the earnings of both my father, who was also a small town attorney in the same town (and same company!), and my mother who was a teacher. What I discovered was that my grandfather made as much income as both of my parents did, confirming the point that labor prices have dropped due to more people entering the workforce.
While it’s good that all these people were allowed the freedom to join the workforce, there’s too much of a good thing. To hear our full discussion watch our video here.
Millions of jobs are being lost to retirement each year without being filled
The US labor force is losing millions of baby boomers to retirement each year. Jobs lost are outpacing jobs filled by a significant margin. In 2020 alone, nearly 30 million baby boomers left the labor force. This number was accelerated by the outbreak of Covid-19, but it doesn’t alter the fact that each year the pace of retirement continues to rise all the while jobs are not being filled. And this is not a new phenomenon. Economists have known this since the 80s and have been calling it the “Great Retirement”. We are slowly entering the stage of the largest and fastest decline in labor participation in history.
Why should a business owner care?
On the surface, it doesn’t seem like this situation has anything to do with business owners. However, it does. The US labor force is losing millions of baby boomers to retirement each year. In 2020 alone, nearly 30 million baby boomers left the labor workforce. This number was accelerated by the outbreak of Covid-19, but it doesn’t alter the fact that each year the pace of retirement continues to rise. We are entering the stage of the largest and fastest decline in labor participation in history and without a solution. This means that in the coming years, businesses will have a much smaller pool of people to choose from when hiring. In addition, we haven’t invested in the workers needed to replace baby boomers. Not only will businesses have trouble finding talent, they’ll also have trouble finding competency.
Time to act is NOW
Once baby boomers retire, it’s obvious there’s going to be a major labor shortage because there are not enough qualified people to replace them. While the exact impact of this is difficult to predict, it’s safe to say labor will get more expensive because the supply of labor will diminish while demand remains constant. This means businesses have to act now to adapt and adjust their strategies to increase labor efficiency and be prepared for the labor shortage crisis we’re slowly but surely moving towards too.
How To Achieve Labor Efficiency Today
In order to prepare for the incoming labor shortage a company needs to think about improving labor efficiency from 3 perspectives: the executive, management and individual level. Each of these levels contains multiple pieces that we’ll dive deeper into.
1. Executive Level
- Vision – Having the correct vision of where the company is heading is one of the most important aspects of improving labor efficiency. Every person and/or department in the company should be on the same page and not move in the wrong direction. There should be no blindspots. For example, one of our clients was recently in the process of growing and hired multiple account managers. With no vision ahead, these account managers ended up spending 80% of their time doing project management and the other 20% of their time doing the work they were hired to do in the first place. A better vision for the company would have been to hire one half of project managers and the other half account managers. Therefore, everybody on the team should be in line with the vision of the company.
- Coordination – Although coordination is needed at every level, we place it at the executive level because we believe executives need to ensure the company’s efforts are on the right track. Coordination among departments, groups and employees brings harmony in carrying out tasks and activities to achieve a company’s goals efficiently.
- Pacing – Companies are generally familiar with this piece and 90% of the time choose to increase the pace as a way to improve efficiency. Adding urgency to important goals is crucial for getting things done. In some instances however, it may be necessary to slow the pace down. In that way, the quality of work is not being sacrificed for the sake of getting things done sooner. For example, in some cases a marketing executive might want to push hard on the PPC but if there’s an inventory shortage like there was during Covid-19, the better option would be to pace slow and focus on profitability rather than revenue sell-through.
2. Management Level
- Project/Team Management
Companies have a factory mindset when it comes to knowledge workers believing 1 unit of input should equal 1 unit of output. They expect workers to do the actual work and not spend their time managing others. All one needs for self-management is to read productivity books and go all in on the “manage yourself myth”. This has generally not been the case because most people are horrible at personal and team management. That’s why project and team managers are needed, the least invested side of business, to keep workers on the right path. Some software companies understand this and have implemented pair programming, where 2 developers work together on 1 computer. This method is designed to create a collaborative environment in which developers work together to create the right code instead of just any code. Other companies employ one project manager for every 10 programmers to help keep them on track but also assist with distraction producing activities like email responding. Billions of dollars are lost each year due to workers checking their emails multiple times throughout the day and getting distracted. Therefore, more project and team managers are needed to help improve labor efficiency.
- Setting Goals
Setting goals helps create a sense of accomplishment when workers attain them thereby boosting team spirit and improving productivity. Therefore, companies need to set clear and attainable goals and have no more than 3 major goals. Based on our experience, having more than 3 major goals can result in confusion and misalignment among teams and departments. In addition, having the CFO background, we can understand how to make these goals for each person and truly impact the right areas. This is an area where we outshine other firms.
The best companies in the World practice having 1 on 1 meetings with each team member as a way of helping workers grow. These meetings focus on improvement and allow workers access to education, resources and time with their superiors to help them improve their abilities and become more efficient. Unfortunately, most small companies shy away from this practice. They push them off, delay them and treat them like a necessary evil rather than something that can help them push things forward.
3. Individual Level
- Data Availability
Most companies have lots of data available to track information for them like Google Analytics or Facebook Ads. In addition, they sometimes need systems set up to collect information like setting up cameras to track the number of foot traffic in the store or send out surveys to get customer feedback. Best two examples Data Factory faces are setting up proper Google Analytics and Bookkeeping for our clients. We access all of our client’s API’s, extract data, store it in a SQL database, build on top of it and give our clients full access. This process can save years of CTO and developer type of work thus allowing CTOs and developers to focus on other important tasks.
- Data Digestibility
Most employees aren’t the best at extracting data, consolidating it and making it digestible. In fact, they shouldn’t be doing it at all. The goal is to get decision makers straight to analysis, not to data preparation and consolidation. This is where Data Factory outshines other companies. We are the best at extracting data, consolidating it and building dashboards that drive actions and decision making. We help get decision makers straight to analysis instead of spending time on data prepping.
- Decision Process
At this stage, the goal is to get the best decision makers together in order to create the optimal decision making process, document best practices and improve on them. This is a stage where Data Factory can have a lot of great feedback for improving the decision making process.
- Process Design
Once a company is able to make decisions based on the processes set above, it needs to be able to act on those decisions. We recommend the same process as the step above. The goal is to bring the best decision makers together, understand how they take action on all this data, document best practices and improve on them.
- Training Design
Training is the most important piece to achieve labor efficiency yet so few companies do it. Even the largest of companies focus less and less on training. But a person will not be able to use a very efficient, perfectly designed machine, unless properly trained. Companies need to design a training program and make it #1 priority for its employees. This will ensure employees are brought up to speed quickly and understand everything that’s going on. Companies that have the foresight to design an internal training program for converting raw labor into skilled labor, will be set to take on the World of labor efficiency we’re moving towards too.
On the executive level Data Factory can help point out flaws and provide a company with data to help them make decisions. On the management level Data Factory can help build dashboards and the like. On the individual level Data Factory can zero in on achieving labor efficiency for its clients by re-doing everything and doing it our way.
- Why does the Data Factory care?
Our entire business model is based around empowering data to improve labor productivity. The processes we use to help automate systems for our clients makes it easier on them and improves labor efficiency. For that reason, we believe our business model improves peoples’ lives and makes them enjoy their work more. In addition, we have real experience helping marketing agencies, ecommerce businesses, private equity firms and others improve labor efficiency. We can help you too!