There Is No Labor Shortage (At Least, Not the Way You Think)

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Oct 11, 2021

Businesses across the country are struggling to open back up because they just can’t find people to hire. Meanwhile, more Americans quit in May than any other month this century. 

Here’s the hard truth: There isn’t a labor shortage. The workforce didn’t collectively decide to become lazy or suddenly develop the means to take a (much-needed) mental health break. Would-be workers are simply doing a rational cost-benefit analysis, and the result says to work someplace else. 

We default to blaming employers for not paying enough, but like most things in our complex world, higher wages aren’t a silver bullet. The silver lining, though, is that by understanding what workers are grappling with, most businesses can make their jobs more appealing beyond raising wages.

The Cost-Benefit Analysis

People are asking themselves: Given how much it will cost to have this job (gas, childcare, etc.), will it pay enough to survive? Will I be able to do anything with my life beyond just grinding to pay bills? Is there upward mobility? For employers with recruiting and retention problems, the answers are probably No a lot of the time.

Housing, healthcare, education, childcare, and other fixed expenses have gotten insanely expensive relative to wages. The cost of rent, for example, has grown fairly moderately compared to the rising costs of childcare, healthcare, and education. And yet, in June 2021, the average rent for a one-bedroom was $1,663. For that to cost the recommended quarter of monthly income, you’d need to make $41.67 an hour. To spend half your money on rent (a fairly unsustainable situation), you’d need to make $20.84. Meanwhile, the federal minimum wage is $7.25, and activists want $15. See the problem?

Now imagine trying to spend less than you make, in a world where everything is insanely expensive, when you don’t even know how much you’ll make from week to week. Businesses that employ large hourly workforces optimize their work schedules: One paycheck an employee may work 35 hours and earn $700; the next, 25 hours and $500. 

This “I’m going to have an unpredictable amount of money every paycheck” problem is called income volatility, and it makes life as an hourly worker uncertain. Of workers surveyed by the U.S. Financial Diaries, more than 3 in 4 said they’d forgo getting paid more to get paid a more consistent amount

Jobs that create income volatility come with a significant cost. To improve recruiting and retention, help people consistently know how much money they’re going to have.

A New Way to Think About Wages

To make jobs more appealing, we need to think about compensation through the lens of employees’ cost-benefit analysis. Paying more would be great, but caring only about wages is like evaluating a P&L by only looking at the top line. We’re thinking about income in gross terms, when really what determines a person’s ability to survive and thrive is net discretionary income (NDI).

NDI is the money you have left after paying for essentials like rent, utilities, and childcare. NDI is employees’ bottom line. And orienting compensation around the bottom line, as some forward-thinking employers like PayPal have, can be game-changing for recruiting and retaining talent, because you can show employees that they’ll have money to survive, and maybe even thrive.

Benefits That Backfire

Business leaders have for years lamented the difficulty of getting workers to feel the value of their total compensation, benefits, and rewards. The sobering reality is that people don’t value much more than their wage because not much more than their wage is improving their bottom line. 

In fact, when you evaluate your benefits by how much they directly contribute to employees’ bottom lines, you might find that your benefits have zero or even negative value. 

That point is probably worth repeating: Your benefits might be making it harder for you to hire and retain people. 

For example, if you offer a 401(k) with auto-enroll (as 68% of employers do), you’re actually subtracting about 4% of your wage from a person’s bottom line. Your $13/hr wage now feels like $12.50, because you wouldn’t include revenue booked 40 years out on your P&L, and neither do workers.

Focus on Improving Employee’s Bottom Lines

It’s time to reevaluate compensation packages to maximize the value we’re adding to people’s bottom lines. A few ways of doing this can include:

  • Commit to a guaranteed number of scheduled hours per week to reduce volatility. If you can’t, ensure that employees have the tools to predict future net discretionary income. 
  • Reconsider policies of auto-enrolling employees in a 401(k), and consider instead auto-enrolling them in a fully liquid emergency savings plan (officially greenlit by federal regulators in March of this year).
  • Consider benefits that directly contribute to the bottom line, like tuition reimbursement, or matching credit card or student loan debt repayments. Offer transportation and childcare subsidies, or use your leverage to negotiate discounts on your employees’ behalf. People drive shockingly long distances to pay $0.05 less per gallon of gas — you can turn that motivation into a powerful recruiting and retention tool.
  • Provide employees with modern financial benefits to help them avoid predatory short-term creditors. Paying someone who is relying on these products is like your CFO running your business with net negative working capital even if it costs 300% APR to fund the business’s day-to-day operations with debt. Your CFO would never do that, but workers with volatile income and subprime credit often don’t have a choice. They’re carrying their money around in a bucket, and the bucket has a hole in the bottom.

We can’t fix macroeconomic problems overnight, but employers can take quick steps to grow and stabilize employees’ bottom lines — because it’s just about the only thing that will improve the company’s. 

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