In today’s rapidly evolving world, businesses face profound shifts in labour markets, driven by technological advancements, changing demographics, and new workforce expectations. While this transformation affects costs and productivity, it also offers opportunities for innovation and reshapes the strategies needed to remain competitive. Understanding these shifts, and embracing technology and talent development, is not just a matter of staying relevant but a requirement for long-term success.
A new landscape shaped by demographic and technological shifts
Shifts in global workforce demographics are among the most significant drivers of labour market transformation. Ageing populations and declining birth rates, particularly in developed countries, mean that businesses will increasingly face labour shortages.
By 2040, the population aged 65+ is forecast to grow by 33% in developed countries, while the working-age population is set to shrink by 4%, creating significant workforce gaps
Source: Euromonitor International
While this ageing trend strains already tight labour markets, the accelerating retirement of baby boomers is also creating significant skill gaps, driving competition for skilled talent and leading to higher wages. Meanwhile, millennials and Gen Z, who now represent a growing share of the workforce, are bringing new expectations. As these generations prioritise work-life balance, corporate social responsibility, and diversity, companies that do not align with these values may struggle to attract younger talent.
At the same time, the integration of automation and artificial intelligence (AI) is revolutionising different industries. While automation was initially applied to routine tasks, technology is now advancing into more complex areas such as data analysis and customer interactions. Globally, 58% of companies plan investments in automation in the next five years, while roughly half expect adoption of either traditional or generative AI.
Alongside technological advancements, changing employee expectations and the rise of remote work have dramatically altered workforce dynamics. What began as a necessity during the pandemic has now become a permanent shift in many industries. While remote and hybrid models offer flexibility, they pose challenges in sustaining employee engagement, team cohesion, and overall productivity, requiring companies to rethink their management approaches. Businesses that manage to strike a balance – by offering flexibility while maintaining a strong corporate culture and enhancing productivity – will have a competitive edge in attracting and retaining top talent.
Labour and skill shortages are driving up wages, adding pressure on margins
Many industries, from technology to healthcare, are already feeling the effects of global talent shortages, which is exacerbated by skill mismatches. In fast-evolving sectors like tech, where rapid advancements often outpace educational systems, companies are finding it increasingly difficult to hire workers with the necessary expertise. Meanwhile, the healthcare sector faces a looming crisis, with the World Health Organization estimating a gap of 10 million health workers by 2030.
74% of businesses globally reported that labour shortages affected their operations in 2023
Source: Euromonitor Voice of the Industry, Company Strategy, November 2023, n=756
While this talent shortfall is already exerting immense pressure on businesses, it is also driving up operational costs across industries. Tight labour supply, combined with widening skill gaps and pandemic-related disruptions, has fuelled notable wage growth in recent years, further intensifying challenges for companies. For example, wages surged by 24% in the US and by 16% in Germany between 2018 and 2023, driven by tightening labour markets. Major developing economies like India and China experienced even sharper increases of 41% and 46%, respectively, reflecting their rapid economic growth and rising living standards.
Globally, labour costs account for an average of 28% of total business costs across industries, making them some of the most important expenses for any employer. Therefore, rapidly rising wages are squeezing company bottom lines and undermine competitiveness. This issue is particularly acute in labour-intensive service industries, which dominate employment in both developed and developing countries.
Embracing technology, talent development and flexibility are key to tackle labour market challenges
To remain competitive, businesses should take proactive steps to mitigate these challenges. Expanding talent acquisition beyond geographic boundaries and leveraging remote work capabilities can provide access to a global pool of skilled workers. Additionally, outsourcing certain functions to lower-cost regions can help manage labour costs more effectively. These solutions not only broaden the available talent base but also allow businesses to maintain operational flexibility.
Internal solutions are just as important. Investing in process improvements and technology can significantly boost efficiency and productivity. While solutions like automation and AI often require substantial upfront investment, they increasingly streamline routine and repetitive operations and optimise workflows, enabling human workers to focus on strategic, creative and complex problem-solving tasks, driving innovation and competitive advantage.
The transformation of labour markets is an important aspect of the broader New Economic Reality, and businesses that fail to adapt risk falling behind. By embracing technology, fostering talent development, and offering flexibility and support to employees, companies can transform these challenges into opportunities, positioning themselves for long-term success.
For more insights on the transformation of the global labour markets, please read our report, New Economic Reality: Changing Labour Markets.