Academic journal article The McKinsey Quarterly

Help Wanted

Academic journal article The McKinsey Quarterly

Help Wanted

Article excerpt

America's service sector has created millions of new jobs. That's the problem

Companies will need to segment labor markets or change the way they produce a service

Turning dead-end jobs into careers

Companies in the US service sector are second to none. American retailers, banks, airlines, package shippers, restaurants, and hotels lead the world in productivity. They constantly innovate to attract customers. Over the past decade, they have generated tremendous wealth and created thousands of jobs. Yet this formidable record could be jeopardized by a shortage of the one thing every service business needs: employees.

Labor markets in the United States are extremely tight. Nationwide, unemployment stands at about 4.5 percent; in Atlanta, Chicago, San Francisco, and Orlando, the figure is even lower. While this state of affairs affects all employers, it puts particular pressure on service companies, since they have traditionally paid the least and attracted workers who had relatively few options. What's more, the tightness will persist. The US Bureau of Labor Statistics estimates that the total labor force in 2005 will be between 143 and 153 million people, and the number of jobs will be between 140 and 150 million.

As a result, business models based on a steady supply of cheap labor will increasingly flounder as they fail to find people capable of executing them. To continue to grow in such an environment, service companies will need to segment and manage their workforces as deftly as they segment and manage customers. They will also have to structure their business and customer value proposition to fit the employee base they are able to attract.

Paradoxically, the root of the problem is the service sector's success at creating jobs. Millions of new service jobs have come into being since the 1950s, and services will continue to be the primary engine of job growth in the United States [ILLUSTRATION FOR EXHIBIT 1 OMITTED].

This growth in employment is a direct result of the strategies that service companies are pursuing. Many are committed to putting outlets closer to customers. Taco Bell has declared its intention to have 20,000 outlets by the year 2000, for instance, and McDonald's has set itself up in gas stations and Wal-Mart stores. Propelled by commitments to Wall Street and the desire to fill profitable niches while they still can, major service chains are building outlets furiously.

Because service concepts tend to be easy to replicate, service innovators have to move quickly to penetrate local markets before competitors copy or even pre-empt their innovation. Witness the "bagel wars," in which the five leading bagel chains doubled the number of outlets between 1995 and 1996. The high-end coffee business, in which companies like Starbucks and Seattle's Best Coffee rushed to fill markets, tells a similar story. In the temporary help business, the number of agencies expanded from about 12,000 in 1989 to over 20,000 in 1994. Kinko's Copies has grown at an annual rate of 15 to 18 percent for years, and expects to rocket from 850 outlets today to 2000 by the turn of the century.

Until recently, the supply of labor has kept pace with demand, and service companies in particular have benefited from the equilibrium. Labor represents a large share of overall costs in most service industries [ILLUSTRATION FOR EXHIBIT 2 OMITTED]. The bulk of the growth in supply has come from women and baby boomers entering the workforce. In 1950, 31 percent of women participated in the workforce, and made up 30 percent of the total; by 1994, 58 percent of women participated in the workforce, and made up 46 percent of the total.

Young people also contributed to the workforce explosion. In 1950, about 12 million 16- to 24-year-olds were in the labor force; their number peaked at 25 million in 1978, and has fallen back to about 21 million today. Many service industries with heavy frontline requirements have benefited from the influx of women and young people into the workforce [ILLUSTRATION FOR EXHIBIT 3 OMITTED]. …

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