Although stabilizing, the labor market continues to be a challenge for distributors. During the past two years, we saw a significant number of employees quitting their jobs or hopping to other companies in the pursuit of better benefits or higher pay. Now that the labor market is slowing, distributors must be aware of how to attract and retain top talent as the economy enters a potential slowdown.
Jay Denton is the Chief Labor Market Analyst for Think Why and leads the product and market analysis business units for Labor IQ. Dr. Mallory Vachon is the Senior Economist at Labor IQ and leads the company’s research team in producing key insights and forecasts related to the labor market.
In this Discerning Distributor episode, I spoke with Dr. Mallory Vachon and Jay Denton about what is happening within the labor market, best practices for finding and retaining talent, and what distributors should be mindful of going forward.
Alex Chausovsky: During the past two years, we’ve seen a tremendous amount of change in the labor market. Can you talk to us about how we got to where we are today?
Jay Denton: The last two years have been unlike anything anyone’s ever experienced. Before the pandemic, we were in one of the tightest labor markets in more than 50 years. So finding talent wasn’t easy then, but it’s much harder now.
In the early part of 2020, we lost more than 20 million jobs almost overnight. After that, a lot of hiring started to occur, and people began to adopt technology that had been around for a long time but hadn’t been used much until that point. We had to deal with things like remote work, and the competition for labor changed once that happened. For example, employers in Dallas faced more hiring competition from California or New York, so that’s partially what set off the Great Resignation or Great Reshuffle.
Dr. Mallory Vachon: The unemployment rate is at a 50-year low. One of the things that makes it more challenging to find talent is that the labor force, while recovering from pre-pandemic levels, is one to four million below where projections would have placed it in the absence of the pandemic. So, while the pandemic recovery has been strong, it has also created a lot of chaos.
People have moved out of the labor force, either through early retirement, sickness or other factors. There’s just not enough talent to go around. A potential upside is that as we hear about layoffs, there isn’t much evidence that the number has started to tick up overall; unemployment rates are still at historic lows. It’s possible some of the labor market tightness could prevent larger-scale layoffs, as we saw during the Great Recession.
Chausovsky: The number of people searching for work has declined by almost a million. What are you seeing in regard to those numbers, and how do they compare to the last two years?
Vachon: I think the one million decline in job openings is a sign that things are probably starting to cool a little bit. Right before the pandemic, there were six or seven million job openings, which was much higher than we had seen in the previous decade. We’re still pretty elevated in terms of labor demand, but I imagine that will start to tick down a little bit more.
There will probably be fewer hires because there are fewer people, fewer openings and fewer people quitting their jobs. Lowering turnover should bring down some of the wage growth we’ve seen, too, especially coupled with the federal rate hikes to address inflation.
Denton: From an employer’s standpoint, fewer job openings also usually means there are fewer recruiters coming after your people and fewer opportunities for those who may be willing to go and look for another job. There is likely to be some softness relative to where we’ve been; we’ve been on an unsustainable pace. No matter what, we’re likely going to moderate down; it’s just a question of how much.
The good news for businesses is that the turnover companies have been experiencing should get closer to normal levels as we start to get into that environment. On the hiring front, you won’t have as much competition if you’re a business still proactively trying to hire.
Chausovsky: For distributors hearing this message that things will start normalizing and returning to the labor market we saw before the pandemic, what should they think about, and how should they respond to that information?
Denton: Start focusing on next year. If you look at Wall Street Journal’s latest forecast, the economists they surveyed, on average, thought job growth would be negative at some point next year.
We’re looking at a period where consumer demand will be a bit softer. It’ll probably hit some industries and some types of jobs differently, but a slowdown is likely on the way, which will impact the hiring market. So be mindful of that when doing business planning and thinking about your products and people.
Vachon: To Jay’s point, being able to serve in an advisory role, either with your internal teams or with your external clients, will provide value. As things do slow down, there will still be hiring and labor market activity. So think about how you will differentiate yourself with advisory services, data, and leadership and how you can help your clients navigate a much tighter time.
Chausovsky: Do you think a slowing environment will draw some people into the labor market? What will the likely impact on wage growth be due to the slower economy and potentially higher labor force participation rate?
Vachon: The labor force participation rate has been declining over time. We are up against a demographic challenge. As baby boomers age out of the labor force, that number will start ticking down. I think inflation and other deteriorating economic conditions could bring people back into the labor market because they will need to earn money to support their families.
Denton: Regarding salary and compensation data, we looked back at our forecast from before the pandemic and found that we should have somewhere between two and four million more people in the US who either have a job or are looking for one. So two to four million people should be in the labor force but aren’t there. Who are those people?
First, there are obviously people who are no longer with us due to the impact of COVID. Outside of that, international immigration was basically shut down for a couple of years, so there are more than a million people who normally would have moved here during that time to take jobs. There are also more females still out of the labor force right now; that could be because of a baby boom from the pandemic or because their spouse may have more income because of how much wages have gone up. Finally, there are fewer workers aged 55 years or older.
Now that things are slowing down, we could see a rise in the labor force participation rate because of the impact on wages. There were cases with a kind of runaway at the top end of the market where companies were paying people without much experience. I think that’s going to simmer down; I think the top part of the compensation market will hit a ceiling.
Chausovsky: How should companies be thinking about these trends, and how can they capitalize on changes in the labor force?
Denton: Next year’s labor market could look significantly different than this one. Whether attracting new employees or retaining current ones, I think companies will have to reassess how they do these things. I think the number one message is, whether it’s compensation, the way you hire, your messaging or how you present yourself, reassess your methods between now and the early to mid-part of next year.
Vachon: We’ve noticed women, sometimes women of color, have not rejoined the labor force at the expected pace. I think a lot of guidance has been given to companies about increasing flexibility or certain arrangements that may be useful.
But, when it comes down to it, if you’re a nurse or a healthcare provider, you can’t have flexible hours; there are shifts and things that need to be covered. So, there’s an opportunity here to rethink your strategy creatively, like reskilling, upskilling or adjusting your education expectations.
Denton: If you want to hire a manager, you’ll likely have to look for someone who is ready to be a manager, not someone who’s already a manager. We have to hire people and train them up; that’s the only way to maintain these hiring volumes. So when we’re talking about strategies in the early part of next year and into 2024, it’s really going to be about getting people into roles and training them up in that job. Getting people with experience is going to remain very tough.
Chausovsky: What do you see in the labor market data in terms of companies embracing remote and hybrid work styles versus those who are asking employees to come back into offices?
Vachon: Only about 12.8 or 13% of US workers are fully remote. Another 30% are hybrid, and 57% are fully on-site. So about 43% of the workforce is either fully remote or hybrid in some capacity. If you’re in a service sector or retail or manufacturing, those jobs can’t be done remotely – there’s just no capacity to do so.
Denton: 43% of workers have some degree of remote work. Among those, how many work in the office at least part or nearly all of the time? I was in real estate for a long time, and I like to think about migration patterns and the locations where people are dialed in and still moving to different towns. The places that attract talent are continuing to do so. So whether they work remotely or in that town, we still see similar population movements.
Chausovsky: What are your expectations for wage growth next year and possibly beyond that? Also, what can companies do to engage new candidates and retain existing ones?
Vachon: When you compare the salary that is needed to bring someone in, in the current market, it’s seven to 10% above what current employees in that position are making. So when you have a new employee making maybe 10 thousand more than your current employees, you create internal equity challenges that cascade through the following year.
So companies really need to understand whether they are paying their current employees enough. Are your salaries competitive in the market? Filling a position will be harder from a financial perspective than retaining your existing team. You’ll now only have to pay the current rate for the new hire, but you have to consider whether you will even be able to find the right person to fill that role.
Denton: As we’ve said in the past, compensation is just one of the levers companies can use. It’s not the only one, but it can be a very significant one. But, as I mentioned earlier, that top end is going to either go away or come down, and that’s going to put less pressure on companies that are hiring. We’re projecting a more modest 2-3% next year in terms of overall wage growth.
I think the challenge companies have had over the last couple of years is budgeting. If you’re going to budget out your employee costs for the next year, and you’re calculating that normal 2, 3 or 4% wage increase, that means you’re now paying 20% more to catch back up with the market when someone leaves. There should be less of that next year. We think turnover will come down, so your side of the equation should be more predictable.