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Wage Pressure

Daniel Gross

Daniel Gross is executive editor of strategy+business.

 

Precisely a year ago, I noted that the norms surrounding wages may finally be changing — especially for those on the lower rungs of the income ladder. Yes, many states and cities had passed laws that mandated a higher minimum wage. But the more powerful impetus for change, I argued, would come from companies that are large employers deciding that they needed — or simply wanted — to boost pay for entry-level workers. That would send a message to shareholders, competitors, and workers that, after several years of stagnation, wages might finally be on the rise.

Last year, blue-chip companies like Aetna and Walmart were setting examples by unilaterally imposing higher minimum wages on themselves. Regardless of what the state or federal government mandated, these firms noted, the insurance and retail industries, respectively, could now expect to be competing against a leading player that had a higher minimum wage.

In the months since, companies have continued to adapt. There’s been a kind of symbiosis between companies taking action, new standards being imposed, and the labor market itself creating new pressures for higher wages. With unemployment consistently low (it was 4.9 percent in June), and with the economy having created payroll jobs for 69 straight months (a record), there simply isn’t much slack in the labor market. To a large degree, the tables have turned. In 2009 and 2010, lots of people were out of work or underemployed, few jobs were available, and people generally felt insecure about their prospects in the labor market. Today, by contrast, a record number of people hold payroll jobs, there were 5.5 million jobs open at the end of May, and Americans feel, if not totally secure, then more secure about their prospects in the labor market.

 
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Companies have learned, albeit slowly, that if you want to retain your existing team and recruit people for open slots, you have to be more aggressive and may even have to pay more. Indeed, average hourly wages over the past 12 months have risen 2.6 percent. That may not sound like much, but it is the high for this economic expansion.

This mentality shift is continuing to filter into the C-suite. In June, Bloomberg reported that airline companies, many of which are facing challenges in hiring and retaining pilots, are incentives to recruit entry-level pilots: paying hefty signing bonuses, boosting salaries, and offering to fund the expensive training required. The same month, department store Macy’s struck a deal with workers for improved wages and benefits.

Typically, firms that find themselves needing to raise wages like to keep such efforts quiet — as soon as word gets out, current workers, unions, and prospective employers will likely become more aggressive about seeking more. If you show up to a negotiation armed with knowledge that the person across the table has been having a tough time filling the position, you’re likely to swing for the fences when it comes to compensation.

But now, some companies are loudly announcing their wage increases — in part to send a message. This week, for example, Starbucks announced it will raise the base pay of baristas and store managers by 5 percent starting in October. Again, it may not sound like much. But consider that the 5 percent increase is about twice the rate of median wage growth in the past 12 months in the United States. It sends a strong signal to existing Starbucks employees (stick around, you’ll earn more), to potential employees (this is a company at which wages go up), and to competitors (if you’re fishing in the same labor pool as Starbucks, you’d better bring more attractive bait).

If you’re fishing in the same labor pool as Starbucks, you’d better bring more attractive bait.

And on Tuesday, JPMorgan chief executive officer Jamie Dimon penned an op-ed in the New York Times to explain to the public why the bank is going to be raising its self-imposed minimum hourly wage from US$10.15 today to between $12 and $16.50 — a move that will affect some 18,000 employees. Dimon explained the initiative as a tough-minded nuts-and-bolts business decision. But he also pointed out the broader social context in which companies operate. “Wages for many Americans have gone nowhere for too long,” Dimon noted. And he suggested that CEOs and other leaders think more broadly about the positive impact that investing more capital into workers can produce.

The norms are indeed changing.

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Wage Pressure