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The Future of Work How AI and automation are changing the nature of work McKinsey & Company

Machines have only recently started to match human capabilities in areas such as image and speech recognition 1969 2013-2019 Academic article on speech recognition Machine speech recognition error rate, % 23 “Speech recognition has glamour. Funds have been available. Results have been less glamorous. General- purpose speech recognition seems far away. Special-purpose speech recognition is severely limited. It would seem appropriate for people to ask themselves why they are 12 working in the field and what they can expect to accomplish .” 8 Human range J.R.Pierce 6 5 Bell Telephone Laboratories, Inc. The Journal of the Acoustical Society of America, Vol. 46, No.4, (Part 2), 1049-1051, October 1969 2013 14 15 16 2017 Source: J.R, Pierce, “Whither Speech Recognition?”, Journal of the Acoustical Society of America, October 1969; The Economis t; Kleiner Perkins; McKinsey Global Institute analysis McKinsey & Company 2

Machines could already replace 50% of hours worked, and by 2060, might have overtaken human capabilities in all work activities Time spent on current work activities Percent 100 90 Technical 80 automation ~50% 70 potential 60 50 40 30 of current work activities can be 20 automated 10 0 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 2095 SOURCE: McKinsey Global Institute analysis McKinsey & Company 3

However, technical feasibility does not equal adoption Time spent on current work activities Percent 100 90 Technical 80 automation 70 potential Adoption 60 scenarios 50 40 30 20 10 0 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 2095 SOURCE: McKinsey Global Institute analysis McKinsey & Company 4

The net impact of automation and AI on the number of jobs is also likely to be positive, but with significant worker transitions Projected employment demand in the UK, 2017- 2030 Millions 1 30-40% 3 5 of the workforce in developed economies will need to transition occupations or significantly upskill -7 in the next 10 years Jobs lost Jobs gained New jobs Total net jobs Source: McKinsey Global Institute analysis McKinsey & Company 5

From a societal perspective, automation and AI will likely result in further polarisation of the working population 2.0 Labour market 1.8 conditions for top 1.6 and bottom quintile 1.4 occupations in 1.2 the UK 1.0 Z-scores 0.8 0.6 Top quintile demand 0.4 growth to 2030 0.2 Bottom quintile demand 0.0 growth to 2030 Historical Average Median Vacancy Un- Likelihood growth in education gross rate employment participated in jobs level hourly rate training at pay (reversed work scale) Source: McKinsey Global Institute Jobs Lost Jobs Gained model; McKinsey UK Occupational Transitions Model; ONS; Bank of England; McKinsey analysis McKinsey & Company 6

D ifferent local areas are also likely to face different labour dynamics due to currently different occupational and skills mixes Bristol Bradford McKinsey & Company 7

Around the world, we see rising discontent McKinsey & Company McKinsey & Company 8 8

AI adopters with a proactive strategy exhibit higher profit margins Operating profit margin of companies with different AI adoption patterns, 2017 %-point difference from industry average, unweighted Extensive AI adopters 1.8-16.7 with proactive strategy Partial AI adopters -4.7 3.2 or experimenters Non-adopters -5.5 1.5 SOURCE: McKinsey Global Institute analysis McKinsey & Company 9

Executives see skills shortages as a major barrier to transformations, but are not prepared for the shifts ahead ~90% ~80% of executives see skills of executives say their companies gaps as a major hindrance are not adequately prepared to in digital transformations address the skills gaps Source: McKinsey Global Institute McKinsey & Company 10

The occupations that are already facing shortages are likely to see the largest increases in demand for talent by 2030 Median gross hourly pay for full-time employees, 2018, £ Projected growth in employment demand, 2017-2030 <10.6 14.2-17.8 >21.4 10.6-14.2 17.8- 21.4 %; bubble size = employment in 2017 Teaching and educational ICT professionals 30 professionals 20 Elementary storage occupations 10 0 Nurses and midwives -10 Elementary sales occupations -20 Administrative occupations: finance -30 -0.8 -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1.0 Occupational Talent Shortage Index, 2019 Average z-score of shortage indicators Source: McKinsey Global Institute Jobs Lost Jobs Gained model; McKinsey UK Occupational Transitions and Skills Mismatch models; OBR; ONS; “Using job vacancies to understand the McKinsey & Company 11 effects of labour market mismatch on UK output and productivity”, Bank of England, 2018; Migration Advisory Committee; McKins ey analysis

Sectoral talent shortages are also likely to be exacerbated Relative Occupational Talent Shortage Index in the UK Current Future Health and social work 0.26 0.54 Education 0.13 0.35 Public admin and defence 0.13 0.22 Information and communication 0.50 0.19 Energy utilities 0.25 0.11 Professional services 0.35 0.08 Finance and insurance 0.30 0.07 Recreational services 0.11 0.04 Construction -0.01 -0.06 Hospitality -0.05 -0.07 Manufacturing 0.05 -0.08 Wholesale and retail -0.09 -0.09 Transport and storage -0.07 -0.19 Source: McKinsey Global Institute Jobs Lost Jobs Gained model; McKinsey UK Occupational Transitions Model; OBR; ONS; Bank of England; McKinsey & Company 12 Migration Advisory Committee; McKinsey analysis

By 2030, workers are likely to spend more time using social and emotional, higher cognitive, and technical skills Physical and Higher Social and Basic manual cognitive emotional Skills cognitive Technological 55 Change in hours spent 24 by 2030 1 , 8 % -14 -15 1. United States and 14 European countries Source: McKinsey Global Institute analysis McKinsey & Company 13

It is not just digital and technology skills that will be in short supply Projected number of under- skilled workers in the UK in 2030 in ‘business -as- usual’ scenario Top 6 knowledge areas Top 8 workplace skills (>5m under-skilled workers) (>1.5m under-skilled workers) Computers Interpersonal Administration Basic and Leadership and skills and and literacy, electronics managing others empathy management numeracy 1.6m 5.8m 1.7m 11.0m and comms Complex 5.7m information processing English and language interpretation 2.2m 6.8m Customer and Basic digital skills Mathematics Critical thinking personal service 21.2m 1.6m and decision 2.6m making 10.7m Advanced Project Education communication manage- and training and negotiation ment 1.8m 10.6m 5.5m Source: McKinsey Global Institute Jobs Lost Jobs Gained model; McKinsey UK Occupational Transitions and 2030 Skills Mismatch models McKinsey & Company 14

Skills shortages are expected to undermine companies’ financial performance What do you expect to be repercussions of your organization not being able to get the skills you need? % of respondents, up to 3 responses Financial performance will suffer 30 Top-performing employees 25 will leave Will not achieve our growth 25 aspiration Will not be able to fully capture value from automation or AI 23 technologies Will not be able to expand into 23 new markets Source: McKinsey Global Institute workforce skills executive survey, March 2018; McKinsey Global Institute analysis Source: McKinsey Global Institute workforce skills executive survey, March 2018; McKinsey Global Institute analysis McKinsey & Company McKinsey & Company McKinsey & Company 15 15 15

Businesses can get ahead through creative talent strategies Companies need to craft their Acquire talent from unconventional sources talent strategy with the same degree of care and attention as their business strategy “Rent” talent from external partners A foundational step is to look at the workforce more strategically – and to plan now for future dislocations. Build skills (existing employees) McKinsey & Company 16

The Future of Work How AI and automation are changing the nature of work McKinsey & Company