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Staying Competitive: What to do When Wages Spike

Post Author Allie Pizzemento
May 12, 2021 8:30:00 AM
Workforce Insights

The topic has been making headlines for years, long before the COVID-19 pandemic; raising the federal minimum wage. Since 2009, the federal minimum wage has been $7.25, and while most businesses don’t use the federal minimum wage as their base pay, it’s far too common for wages to fall short of being livable.

It’s no surprise that raising wages boosts employee morale and leads to lower employee turnover. Increased retention reduces recruiting and training costs, which for low-wage workers is equal to about 16 percent of the employee’s annual salary.

Most economists recognize that raising wages is not only beneficial for employees but for businesses and economic growth, too.

Given all of this, it’s hard to imagine that rapidly rising wages could be an issue; however, the pandemic has caused wages to shoot up significantly, especially within the manufacturing sector.

Rapidly rising wages are causing significant issues within the labor market and making it very difficult for smaller operations to compete with the high wages offered by larger companies. Businesses are being faced with a difficult question;

How much should wages be raised, and what must be sacrificed to get there?

What’s Happening in the Market?

Advertised wages have risen 16% in a single year. Specifically, wages for manufacturing workers across the United States have risen 6.5% in the last six months and are continuing to trend upwards.

In Charlotte, NC, the average salary for production workers has risen 3.4% in the last six months. In Atlanta, GA, wages for Forklift Operators have risen 6.8% in 12 months.

Businesses are being forced to raise their rates in order to remain competitive in the job market and attract talent. For larger corporations, this doesn’t pose much of a threat, but for smaller businesses, increasing wages too quickly could be devastating.

Looking at the various studies conducted on the federal minimum wage offers insight into the effects of increased wages. According to the Congressional Budget Office, "the [Raise the Wage Act] will likely raise wages for 27 million Americans, raise almost a million people out of poverty and increase aggregate wages for low-wage workers by over $300 billion over the next decade . . . the same study also projects that this policy could cost 1.4 million jobs … and the loss of some small businesses."

However, in order to raise their wages, businesses are having to cut back on hours, production, and resources, all of which could result in detrimental consequences.

Why is it Happening?

Like nearly every other economic phenomenon to occur in the last 12 months, the rapid wage increase was heavily influenced by the COVID-19 pandemic. 22 million jobs were wiped out in April of last year, nearly 10 million of which have yet to be recuperated. US employment dropped 7% from September 2019 to September 2020, while average weekly wages increased 7%, according to a new report from the BLS. According to Emsi, the labor force participation rate dropped a staggering 60% when lockdowns began last year and has risen only 1% since.

As things begin returning to normal, millions of job postings are flooding the market, which typically drives wages down. However, due to the significantly reduced labor force participation rate, there are approximately 6 million fewer workers available, making all those new positions difficult to fill.

Companies are raising wages as an incentive to attract people back to the workforce, and remain competitive with other companies in their market and industry.

Additionally, low-income jobs were disproportionately affected by the pandemic and as these jobs disappeared, the average wage for all jobs jumped up. This caused a false phenomenon that wages were rising, which resulted in wages actually rising to satisfy people's perceptions.

With increased wages can come layoffs, slow-downs, and even shut-downs unless the proper steps are taken, and balance is maintained. Everyone deserves a livable wage; rates have needed to increase for some time.

Doing so responsibly and ethically is the key to minimizing potential consequences.

How Should Business Leaders Handle it?

There are a few different ways to mitigate some of the issues that come with rapid wage increases.

The first step companies should take is examining the landscape of their labor supply and comparable compensation. It’s extremely common for major companies (think Amazon and Walmart) to announce they are hiring entry-level employees en-masse with above-average wages.

In these situations, it’s better to increase the wages of your existing employees, rather than risk losing them without being able to replace them. They can also offer retention bonuses to lower potential turnover.

If businesses are looking to hire new talent, they can create incentives beyond pay scale like improved benefits, better hours, perks or discounts, sign-on bonuses, or referral bonuses. Also, by implementing flexible workforce solutions, like MAU’s Part-Time Program, businesses can navigate higher wages, attract new talent, and boost employee morale without sacrificing their bottom line.

If budget is a concern, businesses can manage it by increasing retail prices or cutting employee hours. It should be considered, however, that both have potentially negative consequences, like a weakened customer base and increased turnover. Additionally, these issues should be handled in the most ethical manner possible; people should always come first.

Everyone deserves a livable wage, and raising rates responsibly is the key to minimizing potential consequences for both businesses and workers.

At MAU, we strive to create a healthy, mutually sustainable relationship between business owners and their employees by prioritizing competitiveness and success through long-term workforce solutions.

We developed an Infographic that explores four key factors that are moving us towards a low labor force participation rate, driving wages up, and creating a very unique talent shortage. Get it by clicking below.

MAU - Wage Inflation Infographic


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