As the new administration shifts into high gear, policymakers may find themselves dealing with tight labor markets—a long-term structural trend in many advanced economies. McKinsey estimates that GDP in 2023 could have been 0.5 to 1.5 percent higher across these economies if employers had been able to fill their excess job vacancies. America is punching below its weight on potential labor productivity—the value added per hour worked—and sectors such as healthcare, construction, and small businesses are especially affected. Consequently, workforce shortages remain a reality in many parts of the economy and can only intensify as demographic shifts gather pace. Falling fertility rates, higher life expectancies, and declines in working-age populations will have profound effects on the global workforce (Exhibit 1).
This will require rethinking long-standing work practices and doubling down on automation and AI to boost productivity, especially if labor participation rates and working hours flatline. Public and private sector organizations alike will need a renewed focus on boosting productivity—especially in small businesses—and developing human capital to fill the evolving jobs of the future. Some types of firms excel at this and may serve as examples for the rest.
The effects of labor shortages
US productivity is lagging as the country faces its largest shortfalls in labor availability in two decades. Historically, labor productivity has contributed 2.2 percent annually to economic growth since World War II. However, from 2005 to 2019, it grew at only 1.4 percent annually, increasing to 1.8 percent since 2019 but remaining below potential.
As of May 2024, the United States had 1.5 million fewer unemployed workers than available jobs, compared with a surplus of 12.7 million unemployed in 2009, after the financial crisis. Following oscillations in supply and demand during the pandemic, labor markets have stabilized. As of February 2025, unfilled job vacancies were 4.5 percent of labor demand, down from just over 5 percent a year earlier. Labor shortages continue, though their impact varies by sector. Health care services, as well as accommodation and food services—sectors with low or slow productivity growth—have higher-than-average job vacancy rates. In the labor-intensive construction industry, job openings have decreased but underlying skill bottlenecks remain. In some sectors, factors such as high regulation, lagging technology adoption, or low levels of capital investment can slow productivity even if labor is adequate. In contrast, sectors like retail trade have reduced both employment and job openings through investment in automation and self-service. High-productivity sectors like finance and IT have experienced fewer labor shortages, while small businesses with lower productivity and limited pay scales are struggling the most.
A shifting demographic
Advanced economies are moving toward an era of “youth scarcity.” While short-term conditions may fluctuate, the long-term trend is clear: A worldwide demographic shift is transforming population structures in advanced economies from pyramids (structures that are wide at the bottom), with many young people in or soon joining the workforce, to configurations resembling obelisks (structures that are narrow at the bottom), with fewer people of working age relative to seniors who are heading into retirement (Exhibit 2).
What matters most is the middle of the demographic—people of working age. In the United States, the share of working-age people (15 to 64 years old) peaked in 2007 and has been declining since—a trend that will likely slow economic growth. Such decline could potentially be mitigated by increasing participation rates by 2.7 percentage points or by adding 1.5 more hours of work per week on average. However, over the past 25 years, labor intensity—more workers or more hours per worker—has contributed little to per capita GDP growth; productivity gains have driven most of the increase. Immigration has long been a growth driver, but given its uncertain future, the United States should double down on boosting productivity to sustain economic growth.
Automation, AI adoption, and reskilling
Accelerated automation and AI adoption that augment and enhance workers could increase productivity considerably. McKinsey Global Institute analysis indicates that up to 30 percent of current work time could be automated by 2030, in the wake of recent advancements in gen AI, releasing worker time for more valuable activities. Combining all types of automation—from gen AI to robotics—could help drive US productivity growth from about 1.8 percent in 2019 to between 3 and 4 percent annually (Exhibit 3). This projected shift would free up millions of work hours that could be redirected to growing fields like healthcare, STEM-based occupations, business and legal professions, and construction. By 2030, about 12 million workers may need to transition from declining roles to these growing sectors. Workers in lower-wage jobs are up to 14 times more likely to need to change occupations compared with those in the highest-wage positions, and most will need additional skills to do so successfully.
Encouragingly, the US labor market has been more effective at facilitating such occupational transitions when compared with Europe. In the United States, the required transition rate from 2023 to 2030 would be roughly the same as that from 2016 to 2019 and lower than the heightened rate during the Great Attrition (2019 to 2022). The question is whether US companies can sustain this pace, adopting automation and AI while also reskilling and redeploying workers effectively.
With a little help from the government
Government policies can foster collaborations—such as innovation hubs and ecosystems—that enhance technology adoption and productivity. This can benefit both small and large companies. Reshoring manufacturing to America will require improving small-business productivity, and stronger integration with larger firms can aid this. For example, in advanced manufacturing, such as semiconductors, automotive, and wind turbines, close collaboration among large integrators and suppliers can boost productivity and competitiveness. Policy can also support the growth of vibrant business clusters, like the wine industry in Sacramento, California, or the furniture industry in Grand Rapids, Michigan, where small and large companies benefit from regional networks that share ideas, people, and financing. Technology adoption by small businesses can be accelerated through more software-as-a-service solutions that automate back-end operations and improve capabilities in compliance, tax, accounting, and payments. Sectorwide infrastructure, such as an open-data framework, can enhance intercompany connections, enabling financial institutions to use nontraditional data sources for credit underwriting, particularly for underfinanced companies, including small and midsize enterprises.
What American businesses can do
Organizations will be crucial to revitalizing the American workforce. Technology adoption, especially AI and automation, should be a top priority. Many companies struggle to articulate the potential of these technologies and their impact on roles and skills. Once leaders grasp this potential, they should plan workforce transformations, including sizing needs and strategies for recruitment, upskilling, and reskilling.
Employers can attract older workers by offering flexible arrangements, leveraging their valuable experience. Firms can also tap into unconventional talent pools by focusing on skills rather than credentials and considering candidates with résumé gaps.
Retaining existing talent is vital. Companies may achieve this by shaping career pathways, fostering new skills, and promoting internal mobility. Some US companies, what we call “People + Performance Winners” (P+P Winners), excel in these areas, achieving better talent retention and financial results. They cultivate a culture of innovation and collaboration, helping employees discover and build cross-functional skills.
P+P Winners target all employees with their initiatives, but they particularly benefit women’s career journeys, which can help close the gender pay gap. Women often build less human capital than men in the same occupations, leading to a gender pay gap of 27 cents on the dollar among US professional workers. Over 30 years, this results in about $500,000 in lost earnings per woman. As they switch jobs, women are less likely to move into occupations projected to grow in demand as forces of technology reshape employment; instead, they tend to move into shrinking occupations. Employers who are P+P Winners can redirect their career paths toward growing occupations, contributing to the economy’s future needs. By adopting strategic automation and reskilling/upskilling initiatives, US companies can drive productivity and economic growth.
At time of publishing, countries worldwide are actively revising tariff and trade policies. Final outcomes and implications for government, business, and individuals are highly uncertain.