US manufacturing is booming. In 2023, the sector received $196 billion in federal spending for manufacturing construction, marking a 143 percent increase since before the pandemic in 2019, as the country ramped up production and built new advanced manufacturing facilities.1 As of April 2024, spending has remained hot, with an additional $32 billion invested—an additional 17 percent increase over the same time last year—boosted by investments such as the $39 billion CHIPS Act.2
The increase in spending should help fuel the US manufacturing sector, which accounted for $2.8 trillion in output in 2023.3 However, if this influx of capital is to translate into meaningful economic impact, the manufacturing sector must address its workforce challenges, including significant labor shortages and stagnant productivity growth.
The manufacturing sector is already struggling to rehire many of the 1.4 million workers laid off during the pandemic. In January 2024, the US Bureau of Labor Statistics reported 622,000 unfilled manufacturing job openings nationwide, while the overall labor force participation rate fell from 67 percent in the 1990s to below 63 percent in 2023. Furthermore, skills gaps can make it feel like there aren’t enough people even if the data show a surplus in the local market.
The available labor pool is expected to face continued challenges because of an aging population, slowing immigration, a lack of access to training, and the growth of competing industries such as e-commerce and healthcare. Manufacturing executives tell us that they already are feeling the pressure in many ways, reporting higher absenteeism, higher attrition in the first 90 days, and mismatched expectations with new generations of talent. All told, manufacturing could face a shortage of 1.5 million to 2.5 million workers by 2030, according to McKinsey analysis.
In addition to the increasing talent shortage, the manufacturing sector is also struggling to improve productivity with its current workforce. Our analysis of US Bureau of Labor Statistics data found that before the COVID-19 pandemic, manufacturing productivity was declining at approximately 1 percent per year between 2015 and 2019. That’s about 2.0 to 2.5 percent less than the rate of the overall economy (around 1.4 percent CAGR), which itself was well below the long-term overall US average of about 2.2 percent (1947–2019). To close the labor shortage in manufacturing through productivity alone, we estimate that the United States manufacturing sector would need a sevenfold increase in its productivity growth rate, achieving 5 percent annual productivity improvements every year until 2030.
Labor-market dynamics can be difficult to model. They reflect a complex interplay among three broad classes of variables: manufacturers’ demand for talent, the local supply of talent, and—equally important—productivity (exhibit). Our research synthesized a wide range of data to help reveal the distinctions employers can make in reassessing their talent strategies across production networks.
What should you do if you are a manufacturer dealing with these challenges and the multitude of effects they create? Well, that depends on where you are operating. In this article, we share how local market dynamics in labor demand, productivity, and labor supply can help leaders diagnose local labor productivity and stability challenges to inform winning frontline talent strategies (see sidebar “The factors that matter in understanding local talent markets”). We also describe how the imperatives of transition, stability, growth, and productivity arise from these local dynamics and the surprising places you might look for solutions.
The long-term viability of any manufacturing company depends on sufficient access to the right talent to meet the expected demand of a geographic area. Although the balance between supply and demand for manufacturing talent inevitably varies geographically, surprisingly few manufacturers have adapted their workforce strategies to incorporate market-specific insights. That may be because for decades, manufacturers had little trouble finding workers, regardless of location. But with demographic changes increasing competition for shrinking labor pools, understanding local labor market dynamics can provide manufacturers with a critical edge (Exhibit 1).
By understanding the balance of talent in every market where they operate, organizations can better prioritize their approaches to talent acquisition, development, and retention in line with local needs. Plotting a location on a chart of labor supply-and-demand factors is a simple—but powerful—way to get started.
The labor supply change provided on the x-axis is a simple measure of expected manufacturing talent supply in a market. For some markets, overall population growth is a good proxy for this measure. However, in many mature manufacturing industries, the impact of aging talent needs to be considered, reducing the replacement rate of local talent supply. The y-axis is determined by historical growth in manufacturing demand and productivity to determine the expected future demand for talent over the expected available talent supply. This measure determines the relative surplus (or deficit) of labor availability.
In Exhibit 2, we applied our model to major manufacturing economies to show how they are likely to experience frontline talent challenges looking ahead to 2030. While geopolitical factors, pandemics, or other unforeseeable events could affect these trajectories, our experience has been that this midterm view is a good place from which to start.
When mapped at a country level, it is clear why multinational employers often struggle to open operations in new locations. The talent imperatives show that companies cannot standardize their approach to talent in the same way they standardize their machines and production systems across production sites.
Country-level market dynamics may not always tell the whole story, however. The labor market dynamics that matter for a particular manufacturing location are those in its immediate vicinity. Exhibit 3 examines how our model predicts the 2030 talent archetypes of US metropolitan statistical areas (MSAs, defined by the US Office of Management and Budget) with significant manufacturing employment.
The labor market dynamics that matter for a particular manufacturing location are those in its immediate vicinity, and they can vary significantly from the national picture. For instance, employers with operations in Cincinnati, Dallas, or Los Angeles may find that even when operating within the US context, they are solving for very different problems at each site. In our experience, employers that have been deploying bespoke talent innovations at the local level often outperform their peers.
For manufacturing companies seeking to address their talent challenges, identifying site-specific imperatives is just the first step. They must also adapt their local workforce models to match the prevailing conditions. Here, companies may find it instructive to look at other organizations that have overcome similar challenges. Success stories might be found along the street or on the other side of the world. We explored how US-based organizations might look globally in the two primary archetypes faced in the United States.
Regions with productivity imperatives, manufacturing labor shortages, and a shrinking labor pool could see fierce competition for labor, making it harder for companies to attract skilled talent in sufficient numbers, and increasing the risk that vital skills and knowledge are lost as experienced employees retire or leave.
To mitigate the impact of labor shortages, manufacturers with sites that face a productivity imperative (for example, St. Louis, Cincinnati, or Chicago) can prioritize two levers: deploying efficient processes and advanced technologies (for example, artificial intelligence, automation, robots and cobots, or augmented reality) and developing a workforce with advanced skills and capabilities to get the most out of these advanced production systems.
These MSAs might look to each other for inspiration, or potentially to Johnson & Johnson operating in the United Kingdom and facing a similar labor landscape. There, Johnson & Johnson was running a complex, labor-intensive process in a tight talent market. To overcome the challenge, the site deployed customized Fourth Industrial Revolution (4IR) technologies, such as adaptive process control, AI, and robotics capabilities, to increase productivity of the frontline workforce. These innovations helped reduce the labor needed for manual label application, a dull and highly repetitive task, by 86 percent, while also enabling the company to produce fully personalized packaging configurations for customers.4
With increasing demand, investment in new capacity, and a growing labor base, MSAs such as Dallas or Houston have a compelling mix of market conditions to build from. To do so, they need to attract and skill a talent base that likely has less experience in a manufacturing environment. Doing so will require a delicate balance between investment in capital expenditures and talent. Sites that are in this archetype might focus on selective investments, which balance across increasing productivity, creating a best-in-class employee value proposition (for example, modern facilities, 4IR automation capabilities, flexible work arrangements, or partnerships for technical training programs) to attract and retain top talent from the growing market.
The Flex factory in Sorocaba, Brazil, could provide inspiration for these MSAs. Recently recognized by the World Economic Forum’s Global Lighthouse Network, the Flex site created impact by deploying select technologies such as digitized workflows and robotic process automation software, to reduce non-value-added work by nearly 40 percent. The factory also upskilled more than 200 employees on developing and using low-code/no-code digital tools to support the transformation, which strengthened employee engagement and boosted output by more than 20 percent.
The dynamics of any market are not fixed and should be reassessed periodically by manufacturing leaders to stay tuned to changes in local trends. Phoenix, Arizona, shows the potential to move from one archetype to another over time. In Phoenix, the labor market’s dynamic outlook for 2030 is in the growth quadrant. However, prior to 2018, it was a stability region with more talent than needed to service local demand. Taiwan Semiconductor Manufacturing Company, to support the launch of new semiconductor manufacturing capacity within the United States, formed a talent partnership with Arizona State University to provide a reliable, highly skilled pipeline to help fill several thousand positions that will be required for a new facility opening in 2025. Partnerships like this have helped Maricopa County become a hotbed for semiconductor industry investment, raising the demand for talent and transitioning the local market into a growth imperative.
For manufacturing companies, a detailed understanding of local labor market dynamics can be a cornerstone of each site’s talent and capital investment strategy. To avoid the kind of talent challenges that can limit output and prevent sites from achieving their growth ambitions, companies should build an analysis of the current state and projected evolution of the market dynamics in the MSAs or countries where they operate or plan to operate. With this tool in hand, manufacturing and supply chain leaders can start to develop the plan of action that caters to each of their sites at a local level. In our experience, manufacturers that build enterprise strategies to support localized solutions have found the greatest success in overcoming talent challenges (see sidebar, “Practical uses of identifying talent archetypes in your network”).
Understanding labor market dynamics is a great place to start, but companies have more work to do to understand all the challenges and opportunities facing their frontline talent. Read “Unlocking frontline workforce stability and productivity in operations” to learn about four additional lenses that create a comprehensive diagnosis and how these elements serve to provide additional input into the overall talent strategy.
