How a Surprising Lack of Workers Is Causing Wage Inflation

Published on Nov 13, 2020

Updated on Nov 3, 2022

Written by Haley Yamane Melhart

In one of the craziest years in recent history, it only makes sense that the labor market is behaving in an unexpected way. Wage inflation is when the cost of labor goes up, in response to economical rising costs. That’s exactly what’s happening today. Despite losing over 21M jobs and regaining only about 60% back so far, widespread talent shortages are reported in nearly every industry—especially those that depend on a steady stream of entry-level (sub $20 per hour workers).

And with more headlines like, “U.S. auto suppliers scramble to fill factory jobs “ and “Half of retailers are having trouble finding employees for holiday season,” it is time to take a closer look at what’s going on.

Four key factors are driving labor force participation rates down, and wage inflation up, creating an odd talent shortage in a year with record-high unemployment:

    1. Furloughed workers are waiting to return to their jobs.

    2. The CARES Act is making it possible for millions of Americans to stay out of the labor force.

    3. People (especially single-parent households) are not looking for work because of virtual K-12.

    4. People are afraid.

1. Furloughed workers are waiting to return to their jobs

In a normal recession, layoffs occur due to a contracting economy, which naturally leads to contracting payrolls. The 2020 shutdown is different because it was voluntary or self-imposed and occurred during a time of tremendous economic expansion. Incomes were rising and most people believed their jobs would return after a brief furlough. Remember, “two weeks to flatten the curve” was the battle cry at the outset of all this.

In fact, eight out of 10 people who initially lost their jobs believed they would eventually get them back (signified on the graph as “on temporary layoff”), according to the monthly BLS unemployment survey. By contrast, during the prior recession in 2009, just over one in 10 people who had lost their jobs believed they would get them back. Despite significant hiring since April, three out of 10 unemployed people still believe they are going back to their old jobs. If you were making good money and believe your job is coming back, you’re probably not looking for work. And this issue is compounded by the fact that these workers are now receiving lucrative unemployment benefits, which brings us to the next major factor.

2. The CARES Act is making it possible for millions of Americans to stay out of the labor force

Today, only half of the population currently receiving federal aid is looking for a job. With the best of intentions, and without putting much thought into how injecting money into an otherwise strong economy might impact the balance, a COVID stimulus package (CARES act) sent stimulus checks of $1,200 to almost all working-age adults and then added $600/week (FPUC program) to existing unemployment benefits at a time when people were not spending money on gas, restaurants, bars, or anything related to travel or vacations.

Even though the higher support payments went away at the end of July, lost wage replacement checks of $300/week were distributed through September. Pandemic Unemployment Assistance (PUA) checks are still being issued (and are relatively easy to obtain), and all 50 states are still offering extended benefits.

As of this writing, there are still 9.3M people on PUA. The Department of Labor website states:  “To qualify for PUA benefits, you must not be eligible for regular unemployment benefits and be unemployed, partially unemployed, or unable or unavailable to work because of certain health or economic consequences of the COVID-19 pandemic.”

If we add up the total number of people on any form of unemployment assistance, we find over 21M people are still receiving federal aid. This number is problematic because it is much higher than the actual number of people who identify as unemployed, which is 11M.

3. People (especially single-parent households) are not looking for work because of virtual K-12

Another huge factor keeping people out of the labor market is virtual K-12. This is keeping many people (especially single parents) from returning to the labor force. This NPR article highlights the plight of many parents who have (a) been laid off and (b) cannot get back into the labor market because their kids are now learning from home. In addition, some 73% of working professionals have apparently had to change their work because their kids are now not able to go to school. This was further confirmed by the Federal Reserve Beige Book: “Most Districts continued reporting tight labor markets, attributing it to workers’ health and childcare concerns, with many firms consequently offering increased schedule flexibility.”

The labor force participation rate for women, in particular, took a sizable loss and has not made any recovery. In February, 58.2% of white women over 20 years old were in the labor force. By September, that number had dropped to 56.3%. The drop is even more astounding for African American women. In February, nearly 64% of all African American women were in the labor force. By September, that had dropped to 60.1%.

4. People are afraid

In this recent Washington Post article, searches on Indeed for seasonal work were down 38% versus the same time last year. Employers aren’t just competing with each other, they are competing against support payments, temporary barriers like virtual schooling, and one other significant factor: fear.

Due to concerns surrounding the potential for infection, employers are having to pay even more to get people back to work. In fact, during the worst of the pandemic—April through June—there were significant spikes in the wage component of the Employer Costs of Compensation survey. The largest spikes were for low-skill jobs, those spikes were validated in a separate data point: median usual weekly earnings (constant dollars, graph below).

Add all these factors together and you have the formula for a significantly high labor shortage and low labor participation rate, despite what appears to be high unemployment.

And if all these factors remain, there is no easy way back to “normal.” Employers will either have to pay more for entry-level talent than they ever have, or they will have to adopt a new hiring strategy. Adopting one of these solutions is the only way employers can compete for talent until all of the contributing factors mentioned above are no longer in play.

The market is about to be flooded with millions of open positions.

Just like 2020, the situation is only about to get much worse! How? The market is starting to flood with millions of open positions. Businesses are easing those hiring freezes and the dam is about to burst. This should obviously be welcome news, but it could actually create another big problem: wage inflation.

After analyzing hiring initiatives from retailers and logistics firms attempting to ramp up hiring for the holiday season, we found a staggering 1M open positions. According to JOLTS data, retail trade alone currently has over 653K open positions. If they were to fill those jobs, they would eclipse their pre-COVID employment level by 154K!

While retail tries to ramp up hiring for the holiday season, other industries are attempting to recover from shutdowns. Restaurants (+700K openings), manufacturing (+ 460K), and construction (+265K) all have their eyes on the same workforce.

Warehousing is another key driver of lower end, entry level hiring. A review of warehousing job postings for Chicago found over double as many postings for August-September 2020 vs the same two months of 2019. Further, employers are having to advertise a lot more (using two more posting sites than the prior year on average) to find the talent they need.

If this was not enough, business services firms are now showing some 1.3M openings. This includes staffing firms servicing all kinds of temporary lower-paying jobs in manufacturing and offices, as well as life sciences firms trying to find people to work as contact tracers and testers. The contract tracing work should be of particular note. These firms are using taxpayer dollars to hire nearly 180K people at $17-22/hour (including benefits) and these people can all obviously work remotely. If you aren’t familiar, $17-$22/hour for call center type work is very high for such a low-skill, no prior skills or training type job. Telemarketers only make about $12-13/hour for the same work. The federal dollars are inadvertently creating competition for other firms who are trying to hire for these hourly wage jobs. This is going to force many companies to either rethink their hiring needs or to bring their wages up to compete.

To see what a labor shortage looks like in action, manufacturing new orders for consumer goods are at historically high record levels but industrial production is stuck, largely due to a lack of workers.

Add it all up and this means that retailers, restaurants, logistics firms, manufacturers, construction companies, and other industries that demand a lot of entry-level employees are struggling to find the talent they need for the price they are used to paying. They will need to pay significantly more (up to or exceeding $4 or more per hour depending on their current level of pay and location) to pull people back into the labor force. Before the pandemic hit, pay rates for retail workers and cashiers were just shy of $12/hr (BLS, OES). However, with recent announcements by WalmartAmazon, Target, and numerous others, $15/hr is the new minimum standard with many companies quickly promoting people to team leaders and paying $18-21/hr.

To deal with this new crisis, there are two primary steps employers must take: 

1. Offer higher wages

Easier said than done, right?

The first step companies can take is examining the landscape of their market supply and comparable compensation. It is common for big-box retailers to announce they are hiring entry-level employees in volume with above-average wages. If this is the case for your market and your needs are short term, it’s better to increase the wages of your existing employees, rather than risk losing them without being able to replace them.

For example, cashier associates in Chicago make about $22K (median annual earnings or roughly $11/hour) and there are some 97K of them. If demand goes up and wages increase companies will likely struggle to keep them at the rate. If your company has cashiers at that level, you will want to evaluate the importance of keeping them. If you do want to keep them, one of the first steps you could take is by offering your existing team above $24K ($12/hour), which is 15% higher than the median. But, even that might not be enough.

To understand a specific market, there are a number of things you should consider:

  • Supply by compensation – Nearly 97K people work as cashiers at $22K/year.

  • Companies hiring for the jobs you need to fill – 7.5K businesses in Chicago employ cashier associates. Walmart, Jewel-Osco, McDonald’s, Home Depot, and Target are the largest employers.

  • The number of unique postings for a given role to establish the competition for talent – There are currently nearly 10K active postings for cashiers at $22/year.

  • Historical wage data

2. Provide less restrictive job requirements

In times of incredibly tight labor markets, it is critical to widen the hiring net as broadly as possible and be willing to upskill your own talent if you want them to stay with you. Every occupation has a baseline set of skills that are often shared broadly amongst industries. For instance, entry-level jobs like cashiers, retail sales associates, warehouse associates, and telemarketers all require skills like communication, attention to detail, customer service, basic math, and problem-solving. Those are some of the key building blocks and companies would do well to make sure that their hiring focuses on the most core or essential skills and holds back the more advanced, nuanced, or harder-to-find skills—if they want to cast the broad net.

Consider scaling back things like required degrees, prior industry experience, years of experience, and too many skills requirements to increase the size of your candidate pool and make it easier for people to apply. And if you really need those additional skills, consider offering them during onboarding or via job training once they get hired. Again, those skills are important. It is just going to be tough finding what you need with a lower labor force participation rate and increasing wages. Get excellent and efficient at training and mentoring. Build the workforce you want and try to avoid hiring a ready-made workforce you cannot afford.

Wage inflation could be the new normal

To say the least, it is odd to be talking about low labor force participation in a time when unemployment is so high and so many Americans have seen economic hardship. This wage inflation trend will have a wide array of market influencing and shaping effects over companies, regions, people, and policymakers. We don’t know if current rates are a trend or if they’ll become the new baseline. As a result, we will work to stay up on the trends.

Now you have the big picture. Next, let’s break down how these important issues result in recruiting challenges and how data can help improve your hiring strategy.

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