Labor cost pressures are a growing concern for employers, who must find ways to manage their labor costs while also trying to attract and retain employees in the face of rising wages. In this article, we’ll look at the cause of labor cost increases, their impact on employers, and explore strategies for managing these new challenges.
What’s Causing Labor Cost Increases?
Labor Force Participation
In the United States, nearly 125 million people participate in the labor force, with 54% of those who are employed being women and 46% men. More than 85 million people have full-time jobs, while the remainder either work part-time or are unemployed.
The labor force participation rate has been falling since the 1970s and is currently at a historic low of 61%. This means that fewer people are working or actively looking for work than ever before. The fall in labor force participation has been driven primarily by demographic changes, with younger and less-educated workers leaving the workforce at higher rates than other groups.
Unemployment is a measure of the health of an economy. The unemployment rate is the percentage of people who are unemployed. Unemployment affects different groups in different ways, but it can be difficult for anyone to find work if there are not enough jobs available.
Today there are nearly 6 million unemployed people. Job seekers have enjoyed their “in-demand status” as nearly two jobs are open for every unemployed person. Even as the world continues to recover from COVID, the global economy is moving forward and there are multiple indicators that show it will continue to be an “employee’s market.”
Job Openings and Turnover
In 2022, job openings are at record highs. The number of job openings in the US was over 11 million in April of 2022, “matching market expectations and suggesting firms continued to struggle to hire new workers.” per Trading Economics.
Ample job openings are a sign of labor scarcity. With the unemployment rate dropping and more people entering the workforce, there aren’t enough workers for all the jobs available in some industries and locations. This causes inflation pressures on wages and prices. Higher demand for labor means that employers have to increase wages in order to retain talent (or attract new talent), which then increases costs for consumers because prices get passed along through supply chains as well as directly affecting customer service quality (since companies need more revenue).
Turnover rates among top talent have increased due to inflation pressures like increasing healthcare costs and minimum wage hikes in certain states.
To cope with these rising costs, employers will need to do the following:
- Pay more to retain current employees
- Pay more to attract new employees
- Increase their labor force size in order to meet demand or keep up with growth
- Utilize non-traditional employment models such as project base or contract positions
This can be further complicated by the fact that many employers may have difficulty finding the right people for their business, especially if they rely on specialized skill sets that are becoming harder and harder to find locally (such as computer programmers). In order to fill these roles, it’s likely they’ll need to pay higher wages or benefits packages than they’re used to paying—or relocate workers from outside of their local area, hire remote staff, or freelance workers.
Employers are facing challenges of labor cost increases. This is a result of a combination of factors, including: Labor force participation rates have dropped over the last decade, which means there are fewer people to fill open positions and even fewer qualified candidates to fill higher-skilled jobs as well. Job openings are at an all-time high, which makes it harder for companies to find quality candidates quickly. Turnover rates among top talent have also increased as workers seek higher wages to pay for living expenses everyday essentials that now cost more.
Overall, these trends are creating a new set of challenges for employers. On the one hand, there is an increased need to hire workers and pay higher wages, but on the other hand, there is less available labor to meet this demand due to declining birth rates and increasing retirements of baby boomers. This means that employers will have to invest more in training new employees or outsourcing work to non-traditional employees such as project based workers or contractors, thus creating flexibility in an inflationary environment.
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