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How Companies Can Avoid Getting Left Behind in the Talent Wars

Organizations that don’t invest in their employees may not be able to field a full-strength team.

On July 13, the Federal Reserve released the latest edition of the Beige Book, a compendium of observations, gossip, and free associations — kind of like Larry King’s old USA Today column, but for economy wonks. Nuggets included: “Contacts in Cleveland, Kansas City, and Dallas expressed an optimistic outlook for future automobile sales” and “Contacts in Atlanta and Dallas noted a decrease in rail cargo volume.”

Amid the news from hither and yon, one line stood out to me. The Fed noted that wage pressures were rising in certain regions, “with a staffing contact in Richmond noting that firms that have not increased their wages have been left with the least-skilled employees.”

Um. Duh?

There’s a reason they call it a labor market. Firms have to compete in a relatively open market for the services of employees. For their part, employees have to compete against other potential employees for open slots and bargain with employers for the best terms.

For much of the past decade, the scale has been heavily tipped toward employers. In the wake of the financial crisis, the U.S. economy entered its deepest and longest recession since the Great Depression. As 8.7 million payroll jobs were axed between December 2007 and February 2010, the unemployment rate nearly doubled in the same period, from 5 percent to 9.8 percent. And very few companies were hiring. In July 2009, there were 6.6 unemployed people for every job opening in the U.S. (pdf).

All of which meant that employers had the edge: They could often choose from among many highly qualified candidates, name their own wages, and hold the line on pay increases. The market simply wasn’t forcing them to be more generous. This state of affairs persisted through 2014 — employment expanded, but median wages barely budged.

But the dynamics of markets can change over the course of an economic cycle. And over the past year, employers have been confronted with a changed reality. The expansion is now in its 85th month, the U.S. economy has added payroll jobs for a record 69 months, and there are 5.5 million jobs open in the country. In May, the ratio of unemployed people to job openings was miniscule — 1.4:1. As I’ve noted before, the expansion and new minimum wage laws in many states and cities are conspiring to begin to push wages up.

As a result, the HR folks are in a tough position. In a tight labor market like today’s, ambitious, qualified people who want to make more money will look more aggressively — and will more frequently find something. With comparatively few people on the sidelines, we’re now at a stage in the cycle where hiring takes place mostly by luring people to leave their current positions. That often means a salary increase. And employees can also use offers of higher wages elsewhere as a way of bargaining for more pay in their current positions.

In markets, tight conditions can lead to spirals — when wages start to rise, employers have to bid more aggressively. Companies that want to retain the good people they have may be forced to react on an individual basis — each time someone threatens to leave, a decision has to be made. Or, as I noted last week, some are being proactive and raising wages on a wholesale level, all the better to ward off poaching.

But companies don’t just have to change their tactics; they have to change their mind-sets. Firms have to start thinking about wages not simply as a cost but as an investment, or as a form of insurance.

Firms have to start thinking about wages not simply as a cost but as an investment, or as a form of insurance.

The observation of the Fed’s contact in Richmond is a fairly banal one: If you don’t pay more, you’ll find yourself employing only those who may not deserve to be paid more. But given the experience of the last several years, it’s easy to understand why this may not be instantly obvious to companies.

The longer this expansion continues, the more companies will face the choice of acting more aggressively on pay and benefits in an attempt to retain skilled workers, or spending more to upgrade the skills of those who stay behind.

Daniel Gross

Daniel Gross is editor-in-chief of strategy+business.

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