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Increasing Pay to Attract and Keep Workers

Employers have multiple reasons for increasing pay level. Some (e.g., PayPal, Gravity Payments) feel an obligation to pay employees a living wage. In other cases, labor market conditions compel employers to raise wages to compete for scarce (qualified) workers. Recently, this has been a rollercoaster ride for employers. From February 2019 through February 2020, the national unemployment rate never went above 3.8 %. By April 2000, due to the pandemic, it shot up to 14.8%. Going into 2022, it was back down to 3.9% and 3% of employees were quitting their jobs each month, the highest quit rate on record. Worker shortages translated into supply chain problems (and, in turn, product shortages/higher prices) and scaled back hours/services for many firms. One step that firms (e.g., Starbucks, Chipotle, Bank of America, Google) are taking is to increase pay. Indeed, the Conference Board is forecasting a 3.9% increase in wage costs for firms overall, the largest since 2008. Unless firms become more efficient or can pass those higher labor costs on to consumers, profits will decrease and for some firms, survival will be at stake.

Questions for Students

1.     Provide examples from your own experiences (as a customer, employee, or manager) of labor surpluses and/or shortages, and their consequences (e.g., scaled back hours/services). What changes in wages and benefits have you experienced or heard about? Do these changes seem to be working? 

2.     Will workers be better off due to these wage increases? Why or why not?

3.     What additional suggestions do you have for how firms can attract and retain workers?

4.     How do firms respond, especially over time, to worker shortages and/or higher labor costs?

Note to Instructors

The most recent annual inflation (prices) increase was 6.8%. Ask students what happens to one’s standard of living if wages go up 3.9%, but prices for the goods you buy have increased 6.8%? [We will take a more nuanced look at this issue in the next case below]. Potential ways firms respond to worker shortages and/or higher labor costs include offshoring, automation, (substituting technology such as robots for workers) and deskilling jobs so that more people are qualified. It might be interesting to ask students if they believe current worker shortages and rising wages seem likely to be temporary or lasting and how that influences how firms will choose to respond to worker shortages and/or higher labor costs.

Sources: David Harrison. Companies Plan Hefty Raises for Workers. Wall Street Journal, December 8, 2021; U.S. Bureau of Labor Statistics, Consumer Price Index, U.S. Bureau of Labor Statistics. Job Openings and Labor Turnover Survey.

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