The war for talent is over

For nearly two decades, the battle for talent has shaped how firms around the world are run and governed. With firms deriving value mainly from their human capital, rather than from the physical assets they owned, a talented workforce came to be coveted more than plants or machines. In 2001, the celebrated management consultant Peter Drucker published an article entitled The Next Society, in which he argued that giving more freedom to what he called knowledge workers is essential, as the key battle of this century is the war for talent. And he was almost right.
Unlike machines, however, human capital cannot be owned. Talented workers can always leave, taking their employers’ value with them. Over the years, firms responded to this threat by decentralising decision-making processes and giving workers greater autonomy. To encourage talented employees to stay, firms introduced incentive pay and stock-based compensation packages, with the hope that equity ownership would give managers a stake in their company’s future.
In other words, the empowerment of talent became the new mode by which firms organised their activities. Consequently, CEO pay has skyrocketed over the past 40 years. With human capital now the primary driver of top incomes in the United States, the “working rich” – rather than financial capitalists – have become the capitalists of the twenty-first century.
My co-author Thierry Verdier (of the Paris School of Economics) and I show that this profound change in the nature of the corporation has been largely driven by globalisation. As companies entered new markets in search of talented workers to hire, the threat of losing valuable employees to foreign competitors increased, fuelling a fight for talent. To attract and retain human capital, companies began offering increasingly higher wages and greater decision-making power to top performers.
In an increasingly competitive environment, new ideas take on greater importance. As Eastern European markets began to open up after the fall of the Iron Curtain, Austrian and German firms decentralised their decision-making. Talented workers were encouraged to show initiative and were given more independence, especially when it came to researching and developing new products.
But now the war for talent appears to be winding down. Nowhere is this more evident than in Silicon Valley, where the fierce competition for human capital has given workers a massive amount of power over employers. To entice potential hires and keep their existing workforce happy, tech companies have had to offer huge pay packages, stock options, horizontal-management structures, unlimited vacations, wellness retreats, and generous benefits.
But those days are gone. As interest rates rise and growth slows, Silicon Valley bosses have begun to reclaim power from workers by slashing perks and initiating massive layoffs. According to data compiled by layoffs.fyi, more than 160,000 tech workers have been laid off since the start of this year. An additional 164,000 lost their jobs last year, with half of these cuts happening in October, November, and December.
The financial sector is undergoing a similar shift, as the ongoing market turmoil and looming crisis lead to layoffs. After two decades of fighting for talent, companies are clearly using the current upheaval to wrest back control and reverse years of management indulgence that have left them with a generation of entitled workers. Bossism and recentralisation of decision-making seem to be the order of the day.
This shift has been triggered by three major events. First, the Covid-19 pandemic and subsequent supply-chain disruptions have accelerated the process of deglobalisation. This trend has likely weakened the global competition for talent, contributing to the recent decline in the college-wage premium and to unexpected wage compression.
Second, with the sharp increase in interest rates driving up the cost of capital, maintaining profitability depends more on retrenchment than on new ideas. Belt tightening is easier with a centralised organisational structure, because companies can exploit synergies across different divisions.
Third, the emergence of ChatGPT and other generative AI programs has allowed companies to automate certain management functions, such as interviewing new hires, checking references, verifying identities, and carrying out health and safety assessments.
This trend will likely accelerate over the next few years, as technological innovations enable companies to automate more high-skilled jobs. Tellingly, just days after laying off 10,000 workers, Microsoft announced plans to invest $10bn in OpenAI, the San-Francisco-based company that developed ChatGPT. The ultimate winners of the war for talent, it seems, will be the machines. — Project Syndicate