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Home Economy

Responding to a Tightening Labor Market

February 26, 2019
Reading Time: 3 mins read

By Brittany Kleinpaste

Labor market conditions across the U.S. are tight. The unemployment rate fell to its lowest point since 1969 last September, and national data show there are currently far more job openings than people seeking jobs. Accordingly, attracting qualified workers is becoming increasingly difficult. For example, in November, 53 percent of respondents to the NFIB Small Business Economic Trends survey reported few to no qualified applicants for the positions needed to be filled.

Economic theory suggests that a tight labor market will force employers to raise pay to attract increasingly scarce labor. And indeed, some firms have raised wages, as evidenced by average hourly earnings rising by just under 3 percent over the past year, compared to an average annual increase of 2.1 percent during the first five years of the current expansion. In addition, survey responses from the Federal Reserve’s 2017 Small Business Survey indicated that more than any other single change, firms are raising starting pay to address hiring difficulties. ABA’s Economic Advisory Committee expects wages to rise by 3.1 percent in 2019 and 3.4 percent in 2020.

While vacancies may force wages up, other constraining factors will keep them in check. Integration of global markets has constrained wages and with the world economy slowing, wages will remain sticky.  ABA’s EAC expects the U.S. economy to moderate this year to 2.2 percent growth (and 2 percent next year), which may leave some firms reluctant to raise wages, as history has shown that nominal wages are notoriously difficult to cut even in a downturn.

As an alternative to raising wages, businesses have begun pursuing other strategies to hire and retain employees, including enhancing benefit plans by offering access to perks such as wellness programs, paid leave, student loan repayment programs and one-time bonuses. A survey by the Society for Human Resource Management found that 34 percent of employers increased benefits in the last twelve months.

Benefits costs have grown to account for nearly one-third of labor costs, steadily rising as a share of total employment costs for much of the past 15 years. Benefits costs for each hour worked rose to 3.3 percent of total employment costs this year, compared to 2.8 percent for wages and salaries. The largest driver behind the growth in benefits costs has been one-time bonuses for workers (notably, not health care costs). Nonproduction bonuses (bonuses not directly tied to employee’s output) were up 13 percent over the past year and account for a record-high share of compensation at 2.4 percent. While this has been driven partially by businesses’ response to the Tax Cut and Jobs Act, it is also a result of the rise in signing bonuses. The use of bonuses by employers to attract and retain talent is an indication of employers’ hesitancy to raise wages on a sustained basis.

With fewer workers with highly-desirable skill sets searching for employment, employers have also had to ease job requirements to fill new positions. Over a quarter of businesses responding to the Federal Reserve’s 2017 small business survey indicated they were easing job requirements. Employers are often providing job training programs to build the necessary skills of new employees.

With such a tight labor market, the consensus is that wages will rise this year and into the next. Expect job growth to slow to about 150,000 per month this year and even less in 2020—all of which should keep the unemployment rate below 4 percent.

Brittany Kleinpaste is VP for economic research at ABA.                                               

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