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Over the past three decades, as developing economies industrialized and began to compete in world markets, a global labor market started taking shape. As more than one billion people entered the labor force, a massive movement from “farm to factory” sharply accelerated growth of productivity and per capita GDP in China and other traditionally rural nations, helping to bring hundreds of millions of people out of poverty. To raise productivity, developed economies invested in labor-saving technologies and tapped global sources of low-cost labor.

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Today, the strains on this market are becoming increasingly apparent. In advanced economies, demand for high-skill labor is now growing faster than supply, while demand for low-skill labor remains weak. Labor’s overall share of income, or the share of national income that goes to worker compensation, has fallen, and income inequality is growing as lower-skill workers—including 75 million young people—experience unemployment, underemployment, and stagnating wages.

The McKinsey Global Institute (MGI) finds these trends gathering force and spreading to China and other developing economies, as the global labor force approaches 3.5 billion in 2030. Based on current trends in population, education, and labor demand, the report projects that by 2020 the global economy could face the following hurdles:

38 million to 40 million fewer workers with tertiary education (college or postgraduate degrees) than employers will need, or 13 percent of the demand for such workers
45 million too few workers with secondary education in developing economies, or 15 percent of the demand for such workers
90 million to 95 million more low-skill workers (those without college training in advanced economies or without even secondary education in developing economies) than employers will need, or 11 percent oversupply of such workers

The dynamics of the global labor market will make these challenges even more difficult. The population in China, as well as in many advanced economies, is aging, reducing the growth rate of the global labor supply; most of the additions to the global labor force will occur in India and the “young” developing economies of Africa and South Asia. Aging will likely add 360 million older people to the world’s pool of those not participating in the labor force, including 38 million college-educated workers, whose skills will already be in short supply.

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To understand where these gaps are likely to arise and have the greatest impact, MGI looked at the 70 countries that account for 96 percent of global GDP and are home to 87 percent of the world’s population. By plotting their populations’ educational and age profiles, as well as per capita GDP, we can see how prepared their national labor forces are to meet future demand, how easily they can grow their labor forces, and how productive their labor is. This yields eight clusters of countries: four in developing economies, three in advanced economies, and one group comprising Russia and Central and Eastern European states.

While market forces will move to eliminate projected imbalances before their full impact is felt, they cannot be avoided entirely without a concerted, global effort by governments and businesses to raise educational attainment and provide job-specific training. Advanced economies will need to double the pace at which the number of young people earning college degrees is rising—and find ways to graduate more students in science, engineering, and other technical fields; these workers will be in high demand, and their contributions will be critical for meeting the rising productivity imperative. Secondary and vocational training must be revamped to retrain mid-career workers and to provide job-specific skills to students who will not continue on to college.

Even then, in the next two decades, the world is likely to have too many workers without the skills to land full-time employment. In both developing and advanced economies, policy makers will need to find ways not only to produce high-skilled workers but also to create more jobs for those who aren’t as highly educated. Solutions include moving up the value chain in developing economies (food processing creates more employment than growing export crops, for example) and finding opportunities for workers without a college education to participate in fast-growing fields—such as health care and home-based personal services—in advanced economies.

Businesses operating in this skills-scarce world must know how to find talent pools with the skills they need and to build strategies for hiring, retaining, and training the workers who will give them competitive advantage. This will include finding ways to retain more highly skilled women and older workers. Businesses will also need to significantly step up their activities in shaping public education and training systems in order to build pipelines of workers with the right skills for the 21st-century global economy.