By TDn2K economist, Joel Naroff, President & Chief Economist Naroff Economic Advisors

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The People Report Workforce Index, published at the end of September indicated that employment pressures are already at a pre-recession high, not reported since late 2007. Yet many employers remain skeptical about any impending shortages, or the need to re-examine compensation. On the heels of last week’s Jobs Report, we asked leading economist Joel Naroff for his take on the labor market and where it is headed.

IN A NUTSHELL: “The labor market has already tightened and it is just a matter of time before wages start to rise, and when that happens, the increases could be sharp.”

I have a favorite saying, “If you get your economics from a politician, you get the economy you deserve” and when it comes to understanding conditions in the labor markets, that fits the bill perfectly.

Over the past two years, naysayers have been arguing that the unemployment rate, which in September fell below 6% for the first time since July 2008, didn’t accurately represent the true condition of the labor market. The reality is that it is a very good aggregate measure and here is why:

  1. Labor force participation rates are going down for very good reasons and it is demographics, not frustration that is driving the decline.
  2. a. For 66 years, the male labor force participation rate has been declining. That is a trend if I ever saw one.
    b. The female labor force participation rate peaked in April 2000, over fourteen years ago
    c. The number of discouraged workers fell by 18% over the year and is now below 700,000 – or less than 0.1% of those not in the workforce.

    The decline in the participation rate started well before the Great Recession began.

    The implication is that factors, such as the aging of baby-boomers and changing societal values, are driving the decline in the labor force participation rate.

  3. Other key labor market indicators are pointing to a tight market:
  4. a. New claims for unemployment insurance reached the lowest level in history, when adjusted for the size of the labor force.
    b. The number of people unemployed has declined by over 17% in a year.
    c. The number of job openings increased by over 23%, or 910,000, in the past year.
    d. The number of people actually quitting their jobs has increased by 5%.
    e. Job gains have averaged about 225,000 for the past three months, a solid pace. In addition, 2.6 million workers have been added to payrolls in the past year, the largest gain in over eight years.
    f. The number of people working part-time for economic reasons has declined by over 10%, or over 800,000 workers, over the year.

The preponderance of evidence is that the labor market is tightening and the unemployment rate is a good, overall measures. So why are wage gains so tame? The best answer is that firms are still unwilling to behave as they did prior to the Great Recession. In the past, when they needed to hire workers and they couldn’t get the people they wanted, they increased the wage offer. They haven’t had to do that in seven years and don’t believe they should now. However, the growing number of job openings makes it clear that the strategy of waiting to hire and then making a low-ball offer will not work anymore. Ultimately, as unfilled job openings become excessive, companies will have little choice but to offer whatever is needed to fill the positions.

There is an additional reason to think that wage gains could accelerate sharply. Many workers have had limited or even no pay increases for an extended period and at the same time, their benefits have been cut and their insurance costs have been increased. That may have benefitted the bottom line, but it has created a workforce with little or no loyalty. As soon as firms start bidding for workers, they will likely find that their employees are taking offers from other firms. Turnover rates will increase and that will force firms to start improving benefits and pay for not just new workers but current employees as well. That will increase costs sharply.

The implication for the restaurant industry is that costs for not just skilled workers but unskilled workers as well will be rising and that increase is likely to be greater than expected. Firms need to look back to the mid-2000s or even the 1990s and think about what it took to get workers. Even if the minimum wage is not increased, in most places, starting wages will be above the minimum by the end of 2015. Barring an unforeseen economic shock, those high wage gains should continue for a number of years.

Our advice to our TDn2K and People Report members, start building those barriers to exit today. If you have not already been doing so, it is time to examine every part of your employee value proposition. Finally get the recruitment pipeline cranked back into production. It’s going to be another wild ride. You can reach Joel at joel@naroffeconomics.com and reach our workforce experts at www.peoplereport.com

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