Human Resource Supply and Demand
Labor supply is the availability of workers who possess the required skills that an employer might need. Labor demand is the number of workers an organization needs. Estimating future labor supply and demand and taking steps to balance the two require planning.
Human resource planning (HRP) is the process an organization uses to ensure that it has the right amount and the right kinds of people to deliver a particular level of output or services in the future. Firms that do not conduct HRP may not be able to meet their future labor needs (a labor shortage) or may have to resort to layoffs (in the case of a labor surplus).
Failure to plan can lead to significant financial costs. For instance, firms that lay off large numbers of employees are required to pay higher taxes to the unemployment insurance system, whereas firms that ask their employees to work overtime are required to pay them a wage premium. In addition, firms sometimes need to do HRP to satisfy legally mandated affirmative action programs (see Chapter 4). In large organizations, HRP is usually done centrally by specially trained HR staff.
Figure 5.1 summarizes the HRP process. The first HRP activity entails forecasting labor demand. Labor demand is likely to increase as demand for the firm’s product or services increases and is likely to decrease as labor productivity increases (because more output can be produced with fewer workers, usually because of the introduction of new technology).
FIGURE 5.1 Human Resources Planning
The second part of the HRP process entails estimating labor supply. The labor supply may come from existing employees (the internal labor market) or from outside the organization (the external labor market).
After estimating labor demand and supply for a future period, a firm faces one of three conditions, each of which requires a different set of responses. In the first scenario, the firm will need more workers than will be available. A variety of approaches can then be used to increase the labor supply available to a specific firm. These include training or retraining existing workers, grooming current employees to take over vacant positions (succession planning), promoting from within, recruiting new employees from outside the firm, subcontracting part of the work to other firms, hiring part-timers or temporary workers, and paying overtime to existing employees.
Whether there is an adequate supply of labor can be a difficult question, as described in the Manager’s Notebook, “Global Labor Supply: Surpluses or Shortages? Depends on How You Look at It .”
MANAGER’S NOTEBOOK Global Labor Supply: Surpluses or Shortages? Depends on How You Look at It
Global
Is the supply of labor sufficient? From a macro perspective, the answer must be yes. At the time of this writing, the unemployment rate in the United States is close to 7.50 percent. If you look at the supply of labor as simply the number of bodies willing to work, the unemployment rate indicates that there is a surplus of labor: There are simply more people willing to work than there are jobs. But does viewing labor as simply the number of potential workers adequately depict the status of the supply of labor? The picture is more complex when the supply of labor is looked at more closely.
In most organizations, adequately performing jobs requires various types of skills and experience. In other words, not everyone can perform all jobs, and different types of talent are required to perform different jobs. Thus, recognizing that different skills are needed for different jobs leads to the conclusion that there may be labor shortages, even though there appears to be a labor surplus in terms of the number of potential workers.
The reality is that there are imbalances in the supply of labor, with surpluses and shortages occurring across industries and regions. For example, workers in the skilled trades (such as electricians, carpenters, masons, plumbers, and welders) are in short supply in France, Italy, Brazil, Germany, Canada, and the United States.
At a global level, the shortage of college-educated workers is anticipated to be 40 million by 2020. However, over twice that number may lack the skills needed for employment. China, for example, has been making substantial investments in education, but still anticipates a shortage of college-educated workers. India, on the other hand, may have a surplus of labor but a shortage of workers in skilled trades such as plumbing and welding. What accounts for such imbalances in the supply of labor? Several factors are at work here, but some shortages in the skilled trades are due to these jobs being less attractive options to workers. The blue-collar jobs of the skilled trades are not viewed as positively as careers as they used to be. If the jobs aren’t perceived as attractive, it is harder to find qualified candidates who are willing to fill the positions. Variations in the supply of labor across countries can reflect national policies and shifts in labor markets, for instance, from farming to industrial to high technology. Labor markets are dynamic and variations in the supply of labor can occur due to changes in policies and economic conditions as well as people deciding to move or to invest in additional education.
An important message for managers is that the supply of labor isn’t just the number of bodies willing to work. Critical issues are the talent that is available in the market and whether a sufficient number of workers are available in an area or industry at a reasonable wage rate.
In the second scenario, labor supply is expected to exceed labor demand. This excess means that the firm will have more employees than it needs. Firms may use a variety of measures to deal with this situation. These include pay cuts, reducing the number of hours worked, and work sharing (all of which may save jobs). In addition, the firm may eliminate positions through a combination of tactics, including early retirement incentives, severance pay, and outright layoffs. (We discuss these issues in detail in Chapter 6.) If the labor surplus is expected to be modest, the firm may be better off reducing the number of hours worked instead of terminating employees. Under federal law, the latter option would force the firm to pay more into the unemployment compensation insurance program. Furthermore, reducing hours worked rather than laying off workers can avoid additional recruiting and training costs when the demand for labor increases.2
In the third scenario, labor demand is expected to match labor supply. The organization can deal with this situation by replacing employees who quit with people promoted from inside the business or hired from the outside. The firm may also transfer or redeploy employees internally, with training and career development programs designed to support these moves.
A Simplified Example of Forecasting Labor Demand and Supply
Figure 5.2 shows how a large national hotel chain with 25 units forecasts its labor demand for 16 key jobs two years in advance. Column A indicates the number of employees who currently hold each of these jobs. Column B calculates the present ratio of employees to hotels—that is, the number of current employees divided by the current number of hotels (25). The hotel chain expects to add seven additional hotels by the year 2015 (for a total of 32). In column C, the expected number of employees for each job in 2015 is calculated by multiplying the current ratio of employees to hotels (column B) by 32. For instance, in 2013 there were 9 resident managers for 25 hotels, or a ratio of 0.36 (9 ÷ 25). When the number of hotels expands to 32 in 2015, it is forecasted that 12 resident managers will be needed (0.36 × 32 = 11.52, or 12.0 after rounding).
A B C Number of Employees (2013) Ratio of Employees/Hotels (Calculated as Column A 4 25) Projected 2015 Labor Demand for 32 Hotels (Calculated as Column B 3 32)* Key Positions General Manager 25 1.00 32 Resident Manager 9 .36 12 Food/Beverage Director 23 .92 29 Controller 25 1.00 32 Assistant Controller 14 .56 18 Chief Engineer 24 .96 31 Director of Sales 25 1.00 32 Sales Manager 45 1.80 58 Convention Manager 14 .56 18 Catering Director 19 .76 24 Banquet Manager 19 .76 24 Personnel Director 15 .60 19 Restaurant Manager 49 1.96 63 Executive Chef 24 .96 31 Sous Chef 24 .96 31 Executive Housekeeper 25 1.00 32 Total 379 486 * These figures are rounded.
FIGURE 5.2
Example of Predicting Labor Demand for a Hotel Chain with 25 Hotels
The same hotel chain’s labor supply prediction is found in columns A to D of Figure 5.3. Column A shows the percentage of employees in each of the 16 key jobs who left the firm during the past two years (2011 to 2013). Multiplying this percentage by the number of present employees in each of these key jobs produces an estimate of how many current employees will have quit by 2015. For example, 38 percent of general managers quit between 2011 and 2013. Because there are now 25 employees holding this job, it is forecasted that by 2015, 10 of them will have left the firm (0.38 × 25 = 9.5, rounded to 10).
The projected turnover for each job is shown in column C. This means that by 2015, 15 of the current general managers (25 minus 10; see column D) will still be working for the company. Because the projected labor demand for general managers in 2015 is 32 (see Figure 5.2), 17 new general managers (32 minus 15) will have to be hired by 2015.
In the past, many firms avoided HRP, simply because their staffs were too swamped with everyday paperwork to manage the planning process effectively. For example, FedEx used to rely on a 20-page employment application. Imagine the labor and paper such a process entailed, especially when thousands of workers were hired. These excesses ended when FedEx moved to a paperless Web-based system that immediately caught errors as a job candidate was completing the employment application form and reduced by more than 50 percent the time needed for applicants to complete the application form and for recruiters to examine it.3 Furthermore, the Web-based job application system was integrated with the human resource information system (HRIS) so that human resource supply and demand data could be updated automatically. Many software companies offer powerful computer-based HRP programs.4
Supply Analysis Supply–Demand Comparison A B C D E F % Quit* (2011–2013) Number of Present Employees (See Figure 5.2, Column A) Projected Turnover by 2015 (Column A 3 Column B) Employees Left by 2015 (Column B 2 Column C) Projected Labor Demand in 2015 (See Figure 5.2, Column C) Projected New Hires in 2015 (Column E 2 Column D) Key Positions General Manager 38 25 10 15 32 17 Resident Manager 77 9 7 2 12 10 Food/Beverage Director 47 23 11 12 29 17 Controller 85 25 21 4 32 28 Assistant Controller 66 14 9 5 18 13 Chief Engineer 81 24 16 8 31 23 Director of Sales 34 25 9 16 32 16 Sales Manager 68 45 30 15 58 43 Convention Manager 90 14 13 1 18 17 Catering Director 74 19 14 5 24 19 Banquet Manager 60 19 12 7 24 17 Personnel Director 43 15 6 9 19 10 Restaurant Manager 89 49 44 5 63 58 Executive Chef 70 24 17 7 31 24 Sous Chef 92 24 22 2 31 29 Executive Housekeeper 63 25 16 9 32 23 Total Employees 379 257 122 486 364 *These figures are rounded.
FIGURE 5.3 Example of Predicting Labor Supply and Required New Hires for a Hotel Chain
Forecasting Techniques
Two basic categories of forecasting techniques are quantitative and qualitative. The example described in Figure 5.2 is a highly simplified version of a quantitative technique. A variety of mathematically sophisticated quantitative techniques has been developed to estimate labor demand and supply.5
Although used more often, quantitative forecasting models have two main limitations. First, most rely heavily on past data or previous relationships between staffing levels and other variables, such as output or revenues. Relationships that held in the past may not hold in the future, and it may be better to change previous staffing practices than to perpetuate them.
Second, most of these forecasting techniques were created during the 1950s, 1960s, and early 1970s and were appropriate for the large firms of that era, which had stable environments and workforces. They are less appropriate today, when firms are struggling with destabilizing forces such as rapid technological change and intense global competition.
Unlike quantitative techniques, qualitative techniques rely on experts’ qualitative judgments or subjective estimates of labor demand or supply. The experts may include top managers, whose involvement in and support of the HRP process is a worthwhile objective in itself. One advantage of qualitative techniques is that they are flexible enough to incorporate whatever factors or conditions the expert feels should be considered. However, a potential drawback of these techniques is that subjective judgments may be less accurate or lead to rougher estimates than those obtained through quantitative methods.
As described earlier, forecasting supply and demand is often approached as a separate and fairly specialized function. Further, in some ways it is similar to taking a snapshot of the past to predict the future. A drawback of this approach is the rate of change in many of today’s workplaces. Labor supply and demand may shift frequently due to changes in projects, products, technology, competition, and so on.