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Why Employers Have Lost the Upper Hand

Daniel Gross

Daniel Gross is executive editor of strategy+business.

 

In Ernest Hemingway’s The Sun Also Rises, one character asks another how he went bust. The response has become a classic quote with wide application: “Two ways,” Mike said. “Gradually and then suddenly.”

Gradually, and then suddenly. It’s how companies often fail. And it’s how conditions in complex markets shift as well. The underlying circumstances that shape the environment in which you operate can evolve at a snail’s pace, and then shift quickly — either as new actions are introduced or as the agglomeration of changes reaching a tipping point.

If you’re looking to hire somebody these days, that’s precisely where you are. The dynamics of the U.S labor market have changed gradually over the last several years — and then all at once.

Until very recently, the outstanding feature of this economic expansion, which began in July 2009, was that employers called the shots. With unemployment high, employers could choose from an array of appropriate candidates and name their price. The pressure for companies to pay more wasn’t coming from the market at large (there were only 2.2 million job openings in June 2009). It wasn’t coming from peers — on aggregate, private employers were effectively holding wages steady or cutting them. And it wasn’t coming from other forces that shape the market, like legislators. The federal minimum wage rose to US$7.25 in 2009 and stayed there.

Until very recently, the outstanding feature of this economic expansion, which began in July 2009, was that employers called the shots.

And so these last several years have been something of a golden age for corporations. As revenues increased, most companies were able to keep a lid on employment costs. Profits rose rapidly, and steadily accounted for about 10 percent of GDP.

But as this expansion lengthened, conditions, and the broader environment, began to change.

Overall economic growth may have been disappointing, but it has been undeniable. Since September 2010, the U.S. economy has added payroll jobs for 67 straight months — the longest such stretch in recent history. In all, 14.2 million payroll jobs have been added since February 2010. And with lots of baby boomers retiring, the labor force hasn’t grown that much. The result: The unemployment rate is 5 percent — half the peak of 9.9 percent in April 2010. And at the end of March, there were nearly 5.8 million jobs open in the U.S. Add it up, and if you’re trying to fill an open position, you now have lots more competition and a lot fewer unemployed people from which too chose.

All things being equal, this fundamental supply–demand dynamic should make it harder and more expensive to hire.

But other factors shape the market. While the federal minimum wage still remains stuck at $7.25, the same as it’s been for seven long years (as I’ve noted before), an increasing number of states and cities are taking matters into their own hands. Several states have been gradually raising their minimum wages. Then, earlier this year, California and New York, the nation’s largest and third-largest states, respectively, which combined are home to 18 percent of the U.S. population, suddenly passed laws that will raise their minimum wages to $15 per hour in coming years.

Companies have also acted suddenly. Sensitive to criticism, eager to get ahead of state action, and reacting in part to greater competition for workers, several of America’s largest companies have imposed their own substantial minimum-wage increases. Walmart, the largest private-sector employer, in January announced it would impose a $10 minimum wage and raise pay for many other workers; Costco in March followed suit, raising its own minimum wage. Such moves by market leaders have the effect of raising the floor not only for their own employees, but also for those of competitors.

Last week, we saw another sudden action. The Labor Department released a regulation that substantially raises the income threshold for hourly workers eligible for overtime pay — from $455 per week (about $23,660 annually) to $913 per week ($47,476 per year). The upshot: The government says more than 4 million workers who are not eligible for overtime pay will become eligible for it in the coming year. Employers will have to choose between reducing hours for such workers, hiring new people, or paying overtime.

All of these moves are finally showing up in the data — gradually, and then suddenly. According to the Bureau of Labor Statistics, average hourly earnings were up 2.5 percent in April year over year. That may not sound like much, but it is something. And in the first quarter of 2016, wages and salaries paid to U.S. workers were up 4.4 percent from the year before. Both are signs that, for the first time in a long time, wages are growing more rapidly than the economy as a whole.

The shoe isn’t quite on the other foot. But the laces are loosening.

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Why Employers Have Lost the Upper Hand