Analysing labour markets


The starting point for all strategic activity in HRM is to understand the environment in which an organisation operates. It is only possible to formulate the most appropriate policies and practices once its key features have been identified and their importance grasped. In the field of employee resourcing the environment with which we are concerned is the labour market, the pool of available talent in which employers compete to recruit and subsequently retain staff. Later we look at different types of labour market and their implications for employers. Here we focus on three major trends in the UK labour market as a whole and look at how they are affecting decision making in organisations.

1.1. Demographic developments

In 2006 the UK’s population numbered 60.5 million, of whom just over half (30.71 mil­lion) were officially classed as economically active (CIPD 2006a, p. 8). Both figures are projected to rise during the coming decades. The overall population is increasing, despite falling birth rates, because of lengthening life expectancy and substantial net immigration (Blanchflower et al. 2007). The number of people who are economically active is increasing largely because of women spending a greater proportion of their lives in paid work than has been the case historically. Over the longer term, however, the pro­portion of the population that is of working age is likely to shrink in comparison with the total population as more and more people live longer after reaching retirement age. This process has already begun in countries such as Japan and Germany, with significant implications for the provision of care and pensions for the growing number of elderly people. In the UK there are currently 21 people over the age of 65 for every 100 people of working age. After 2010 this number will start to rise significantly. By 2030 more than a quarter of the population will be over 65. The coming years will therefore see a sub­stantial change in the age profile of the workforce, as the population as a whole gets older and a greater proportion of young people remain in full-time education for longer.

There are two major implications for employers. First, because their numbers will fall, it will be progressively harder to recruit and retain the more talented younger workers. Organisations that have sought to resource their organisations by recruiting and training new graduates or school leavers will either have to work a good deal harder at competing for them or have to bring in older people in their place. Second, there are
implications for the capacity of the state to provide a reasonable level of pension for so many retired people. Increasingly, therefore, people are likely to look at the nature of the occupational pension being provided by employers when deciding on their career options. Organisations offering good, well-communicated pension benefits will be better placed than others to attract and retain the employees they need.

Where birth rates are high and where the likelihood of net immigration is also relatively high, population rates are projected to increase. One such country is the United States of America, where fertility rates (i.e. number of children born per couple) are currently running at 2.11 and around two million immigrants settle each year (many illegally). As a result, the US population will overtake that of the EU in the 2030s, passing 400 million by 2050.

1.2. Diversity

According to the most recent government figures 88 per cent of men and 77 per cent of women of working age are either in work or actively seeking work in the UK (Office for National Statistics 2006, pp. 87 and 94). Increased female participation in the workforce has been one of the most significant social trends over recent decades. In 1980 the employment rate for women of working age was 59 per cent, since when the figure has risen steadily, while that for men has declined somewhat. This has happened as more women with young children have opted to work while more men have taken early retirement. As a result there has been some decline in the number of workplaces where women are heavily outnumbered by men and an increase in the number where men are outnumbered by women. Although the vast majority of management posts are still held by men, we have also seen a substantial increase in the number of women occupying such positions – another trend that is going to continue in the years ahead. Despite these developments there remain many areas of work which are dominated by either men or women and a continued substantial gender gap in overall pay levels (women’s average salary is 83 per cent of that for men). A trend which has been identified in many surveys is the growth in the number of part-time workers in the UK. They now account for over a quarter of the total workforce and over 80 per cent of them are women.

Representation of ethnic minorities has also increased over recent years. In the early 1980s around 4.5 per cent of employees came from ethnic minorities. Twenty-five years on the figure is 8 per cent. Whereas in 1980 two-thirds of workplaces employed no one from an ethnic minority, nearly half now do (Millward et al. 2000, p. 43, Kersley et al. 2006, p. 30). Increases in representation have occurred across the industrial sectors. Taken together, these various trends mean that the workforce is steadily becoming more diverse in its make-up. While there remains a strong degree of segregation in terms of the types of work performed, the trend is towards heterogeneity at all organisational levels. There are a number of important implications for human resource managers:

  • In order to attract and retain the best employees it is necessary to take account of the needs of dual-career families. The law now requires employers to offer a measure of support, recent measures being those on parental leave, the right to time off for family emergencies, and the right to request flexible working, but there is a great deal more that can be done. Career-break entitlements, creches and job-share schemes are the most common initiatives. (See Chapter 31 for more on work-life balance issues.)
  • There is a heightened need for awareness of the possibility of discrimination against any group which is underrepresented in the workplace. The perception of inequity, however justifiable in practice, is all that is needed for staff turnover rates to increase and for an employer to gain a poor reputation in its labour markets. Employers are required to pay more serious attention to the issues of sexual and racial harassment in a workplace characterised by diversity than in one which is less heterogeneous. It is advisable to have written policies covering such matters and to ensure that line managers are fully aware of the developing law on harassment.

1.3. Skills and qualifications

The third major development in the labour market is the changing occupational struc­ture, leading to a greater demand for skilled staff. In recent decades the chief job growth areas have been in the managerial and professional occupations, and in service industries such as retailing, security and catering. By contrast there has been an ongoing decline in demand for people to work in the manufacturing and agricultural sectors (Office for National Statistics 2006, p. 7). While technical skills are not required for all the new jobs, social skills are necessary, as is the ability to work effectively without close supervision.

The past two decades have also seen a strong increase in demand for graduates. Over 400,000 now graduate from universities in the UK every year, including 260,000 with first degrees. Unemployment among this group is considerably lower than for the rest of the population whatever the economic conditions, indicating a capacity on the part of employers to absorb the growing numbers into their labour forces. However, despite the increasing numbers of people gaining formal qualifications at all levels, there remain skills shortages. When the economy is performing well these can be significant.

The annual CIPD Labour Turnover Survey for 2006 reported that 82 per cent of employers had had problems filling vacancies (CIPD 2006b, p. 3), mainly due to a lack of required specialist skills and/or experience. In particular, there are too few people with high-level IT and scientific qualifications entering the labour market and far too many people lacking basic numeracy and literacy skills. It is estimated that 16 per cent of adults in the UK are not capable of passing a GCSE English examination, while as many as 29 per cent lack basic skills in mathematics (National Literacy Trust 2007).

Policy initiatives are in place to improve skills levels at both ends of the scale, but it will take a number of years before the effects are apparent in the labour market. Until then employers have to devise strategies to deal with skills shortages in key areas. One approach is simply to work harder at recruiting and retaining employees. Another is to find ways of reducing reliance on the hard-to-recruit groups by reorganising work and dividing tasks up differently so that people with particular skills spend 100 per cent of their time undertaking the duties for which only they are qualified. A third response is to look overseas for recruits interested in working in the UK. Where skills shortages are particularly acute there is also the possibility of relocating one or more organisational functions abroad. Finally, of course, it is possible to recruit people without the required skills and to provide the necessary training and development opportunities.


While the general trends outlined above have significant implications for employers, more important for individual organisations are developments in the particular labour markets which have relevance to them. An understanding of what is going on in these can then form the basis of decision making across the employee resourcing field. There are several different ways in which labour markets vary.

2.1. Geographical differences

For most jobs in most organisations the relevant labour market is local. Pay rates and career opportunities are not so great as to attract people from outside the district in which the job is based. The market consists of people living in the ‘travel to work area’, meaning those who are able to commute within a reasonable period of time. In deter­mining rates of pay and designing recruitment campaigns there is a need to compare activities with those of competitors in the local labour market and to respond accord­ingly. Skills shortages may be relieved by increases in the local population or as a result of rival firms contracting. New roads and improved public transport can increase the population in the travel to work area, with implications for recruitment budgets and the extent to which retention initiatives are necessary. For other jobs, usually but not always those which are better paid, the relevant labour market is national or even international. Here different approaches to recruitment are necessary and there is a need to keep a close eye on what a far larger number of rival employers are doing to compete for staff.

2.2. Tight versus loose

A tight labour market is one in which it is hard to recruit and retain staff. Where the labour market is loose, there are few problems finding people of the required calibre. Labour market conditions of this type clearly vary over time. The higher the rate of unemployment in an area, the looser the labour market will be. However, some labour markets always remain tight whatever the economic conditions simply because there are insufficient numbers of people willing or able to apply for the jobs concerned. In recent years, even at the depths of the recessions of the 1980s and 1990s, it has been difficult to find good IT staff and effective sales people.

A number of researchers have looked at the responses of employers faced with either loose or tight labour markets. Windolf (1986) identified four types of approach used in the UK and Germany which varied depending not only on the tightness of the market, but also on the capacity of the organisation to respond intelligently to the situation. He found that many organisations with high market power (that is, faced with a relat­ively loose labour market) made little effort at all in the employee resourcing field. They simply took the opportunity to spend as little as possible on recruitment and selection and waited for people to come to them. When there was a vacancy it tended to be filled by a similar person to the one who had left, thus maintaining the status quo. Accord­ing to Windolf, the more intelligent organisations took the opportunity afforded by favourable labour market conditions to seek out people with the capacity to innovate and who would develop their roles proactively. All available recruitment channels were used, leading to the development of a richly diverse and creative workforce. A similar dichotomy was identified in the case of tight labour markets. Here many organisations simply ‘muddled through’, finding people where they could, giving them training and hoping that they would stay long enough to give a decent return on the investment. By contrast, the more intelligent organisations were looking at restructuring their opera­tions, introducing flexible working patterns and devising ways of reducing their reliance on people who were difficult to recruit.

2.3. Occupational structure

Labour markets also differ according to established behavioural norms among different occupational groups. The attitudes of people to their organisations and to their work vary considerably from profession to profession, with important implications for their employers. A useful model developed by Mahoney (1989) illustrates these differences. He identifies three distinct types of occupational structure: craft, organisation career and unstructured. In craft-oriented labour markets, people are more committed over the long term to their profession or occupation than they are to the organisation for which they work. In order to develop a career they perceive that it is necessary for them to move from employer to employer, building up a portfolio of experience on which to draw. Remaining in one organisation for too long is believed to damage or at least to slow down career prospects. Examples include teaching, where there is often a stronger loyalty to the profession as a whole than towards the employing institution. By contrast, an organisation-career occupation is one in which progress is primarily made by climb­ing a promotion ladder within an organisation. People still move from employer to employer, but less frequently, and will tend to stay in one organisation for as long as their careers are advancing. Mahoney’s third category, the unstructured market, consists of lower-skilled jobs for which little training is necessary. Opportunities for professional advancement are few, leading to a situation where people move in and out of jobs for reasons which are not primarily career related.

To an extent employers can seek to influence the culture prevailing among members of each type of occupational group. There is much to be gained in terms of employee retention, for example, by developing career structures which encourage craft-oriented workers to remain for longer than they otherwise would. However, a single employer can have limited influence of this kind. It is therefore necessary to acknowledge the constraints associated with each labour market and to manage within them. Different areas of HR activity have to be prioritised in each case. It is necessary to work harder at retaining people in craft-oriented labour markets than in those which are organisation oriented, because people will be more inclined to stay with one employer in the latter than in the former. Recruitment and selection will be different too. Where career advance­ment is generally achieved within organisations, as in banking or the civil service, there is a good case for giving a great deal of attention to graduate recruitment. It is worth spending large sums to ensure that a good cohort is employed and subsequently developed because there is likely to be a long period in which to recoup the investment. The case is a good deal weaker in craft-oriented labour markets where there is less like­lihood of a long association with individual employees.

2.4. Generational differences

Within the constraints of age discrimination law, employee resourcing practices should also be adapted to take account of variations in the age profile of those whom the organisation is seeking to employ. While it is clearly wrong to assert that everyone of a certain age shares the same attitudes and characteristics, significant if broad differences between the generations can be identified. Sparrow and Cooper (2003), in their review of recent research in this area, argue that there are good reasons for believing that the workforce of the future (i.e. made up of young people currently in full-time education) will have decidedly different ‘work values’ from those of the current workforce. This is because the shared experiences which shape the attitudes and expectations of each gen­eration are different. Evidence suggests that future employees will be less trusting of organisations, more inclined to switch jobs, and more prepared to relocate, and indeed emigrate, than is the case today.

Research on generational differences from a management perspective remains under­developed, but a number of writers have put forward interesting ideas. Both Eisner (2004) and Zemke et al. (2000), for example, identify four groups defined by their dates of birth. They go on to argue that each must be treated rather differently if they are to be successfully managed. The four categories are Veterans or Traditionalists (born before and during the Second World War), Baby Boomers (late 1940s and 1950s), Generation X (1960s and 1970s) and a group labelled ‘Nexters’ or Generation Y (born after 1980). Some of the points made about each are as follows:

  • Veterans are attracted to workplaces which offer stability and which value experience.
  • Boomers place a high value on effective employee participation.
  • Xers enjoy ambiguity and are at ease with insecurity.
  • Nexters are wholly intolerant of all unfair discrimination.
  • Boomers do not object to working long hours.
  • Xers require a proper ‘work-life balance’.
  • Veterans are loyal to their employers and are less likely to look elsewhere for employ­ment opportunities than younger colleagues.
  • Xers are strongly resistant to tight control systems and set procedures.
  • Nexters, being serious minded and principled, prefer to work for ethical employers.
  • Xers and Nexters work more easily with new technology than veterans and boomers.

Where a workforce is dominated by a particular age group, it makes sense to manage the workers in a way with which they feel comfortable. Organisational performance as well as turnover rates improve as a result. Similarly, where a recruitment drive is aimed at a particular age group, it is important to give out appropriate messages about what the organisation is able to offer.

Source: Torrington Derek, Hall Laura, Taylor Stephen (2008), Human Resource Management, Ft Pr; 7th edition.

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