Salary Inflation: The Rising Cost of Labor
The Great Resignation isn’t over yet. Faced with a tight labor market, businesses have increasingly found it necessary to raise wages to stay competitive. With the economic future uncertain, managers across a slew of industries are confronted by the dilemma of how to afford salary hikes while maintaining profitability.
High levels of inflation and the lingering after-effects of Covid have exacerbated wage growth. Meanwhile, the quit rate has remained near Great Resignation highs, suggesting that workers remain confident about their ability to switch jobs.
The rapid pace of these changes has made it imperative for those involved in the talent acquisition process to understand how the hiring landscape has changed in a post-Covid world, and where it’s heading in the future.
Annual Salary Increases
Wages and salaries have risen at a blistering 5.1% between September 2021 and September 2022, the largest recorded increase in 15 years. However, during this same period inflation rose by 8.2%, producing a 3.1% pay cut for the average worker in real terms. This presents an obstacle for businesses fighting back against demands for higher raises.
While inflation and wage raises are often thought of as two sides of the same coin, they’re fundamentally driven by different inputs. Labor shortages are the prime mover behind the sudden jump in wages, while inflation has soared largely due to global supply chain shortages, a low-interest rate environment, quantitive easing, and the Russian invasion of Ukraine.
Though inflation is a factor that employees will take into consideration as they look for new jobs, or negotiate raises at their existing ones, it’s important to remember that inflation is far from the only factor at play here. With that said, inflation is still very much exerting pressure on wages. According to a Gartner survey, 63% of executives polled planned on increasing their company’s annual cost of living adjustment in light of the inflationary environment.
Rising Labor Costs by Industry
Not all occupational groups have been affected equally by the current labor shortages. In fact, some fields have experienced only modest gains, while others have seen breakneck raises. Wages have increased the most in traditionally low-skill, public-facing positions, suggesting that Covid’s lingering effects may be driving this growth at least in part.
Across the board, workers with lower-skilled workers and workers with lower levels of education saw the greatest gains in compensation, suggesting that CFO executive recruiting teams may not have to worry too much about the exploding cost of labor.
How Can Employers Mitigate the Rising Cost of Labor?
Savvy employers can mitigate some of these costs associated with the recent rise in wages. While recruiters and talent acquisition teams can’t expect to scrimp on compensation and still attract qualified workers, using a few simple strategies can help alleviate the pressure of rising wages.
Rational Business Minds Think On The Margin
Fine Tune Your Data-Set
While wages have increased across the board, tremendous variation exists not only between occupations and industries but also between regions and within occupational groupings. HR professionals and recruiters should keep abreast of the latest trends to ensure they’re paying a fair market rate. Using an outdated salary band or a salary typical of a higher cost of living area can cause businesses to overpay for talent. Paying close attention to industry trends by researching the competition, and by looking at impartial salary aggregators such as the Bureau of Labor Statistics can help recruiters better understand what compensation package is appropriate for a given role.
Cast a Wider Net with Remote Work
Employers who embrace remote or hybrid work opportunities open themselves up to numerous cost savings.
- Businesses can save up to $11,000 per employee annually on office supplies and rent.
- By expanding the job search across America, businesses in high-cost-of-living areas can hire talented professionals in mid or low-cost-of-living spaces for a heavy discount. It’s already become common practice for companies such as Facebook to adjust salaries based on employee location.
- Relocation will become more difficult with interest rate rises. A person with a low interest rate is not going to find the prospect losing it, only to gain a higher one on a new home.
- Studies suggest that working remotely leads to a rise in productivity. In other words, employers get more bang for their buck when their staff works from home.
Better Fringe Benefits
Employers can become more attractive to workers through means aside from direct compensation. Providing flexible arrangements such as the option to work from home several days a week, or instituting a core hours schedule could provide an enticing incentive for some workers, all without paying a penny more. Benefits like continuing learning opportunities, and access to top-of-the-line equipment serve not only to help the worker but also the employer, making them a win-win option for any management team aiming to attract and retain top-flight talent.
What to Expect Moving Forward?
A recent survey of more than 1,000 HR professionals has revealed that roughly half of U.S. employers are projecting higher salary adjustments in 2023 versus 2022. Survey results suggest a median raise of 4% will supplant the current standard of 3% with a quarter of all employers increasing salaries to 5-7% in the coming year.
Although higher interest rates and the recently passed Inflation Reduction Act have helped to curb the bubble-like growth that has blossomed over the past two years, it’s unlikely that wages will become stagnant or fall anytime in the near future. Labor shortages are unlikely to abate in the near future.
That’s because the labor force participation rate continues to lag behind the pre-Covid era by 1.3% which translates to roughly 3.4 million missing workers. Motivations are multifarious, but a lingering fear of Covid or aftershocks relating to the Covid pandemic and resultant shutdown seem to be keeping many people from rejoining the workforce.
Ghost Mountain LLC helps firms of all sizes navigate salary offerings throughout the talent acquisition process. A consultation with one of our talent placement specialists will make your next executive search a breeze. Let the talent acquisition team at Ghost Mountain use their expertise to find the perfect candidate for any role. Need more personalized guidance? Reach out for a confidential consultation.