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The Tightening Labor Market

Labor MarketAs originally published in ISM’s Inside Supply Management

Despite benefiting from an overall expanding economy, some U.S. businesses are facing a growing labor shortage. According to the most recent data from the U.S. Bureau of Labor Statistics, there were only 1.4 unemployed individuals per job opening in June. This figure is down from the 1.6 unemployed persons in June 2015 and the 6.6 unemployed individuals at the height of the recession in July 2009.

Key segments of the economy are affected by the labor shortage, which is due partly to the misalignment of available jobs with the skills and aspirations of many job seekers. For example, baby boomers who hold skilled jobs are retiring at a high rate and must be replaced. Unfortunately, job seekers entering the workforce are less likely to be equipped to perform jobs that require vocational training or a specific skill set, such as welding. Trucking service providers, warehouse and plant operators face similar hurdles as they attempt to recruit employees. In general, labor has become an even scarcer and valuable commodity, and organizations must periodically evaluate their own talent pipeline and the pipelines of those with whom they contract.

The new reality is that the tightening labor market has put upward pressure on wages. Because strengthening economic conditions have allowed unemployment to stay below 5 percent, workers are more likely to request raises. Furthermore, growing political consensus has prompted municipalities and states to implement higher minimum wages. Updated provisions under the federal Fair Labor Standards Act, which go into effect Dec. 1, will extend overtime rights to more than 4 million workers. Starbucks and J.P. Morgan have announced gradual increases in pay for large groups of workers, and in the legal market, New York City law firm Cravath, Swaine & Moore’s increase of base salary has led many other firms to follow suit. Organizations considering similar blanket salary increases should consider consulting compensation and benefit planning firms to ensure they are properly implemented.

The labor shortage will also affect prices for key business services. IBISWorld anticipates that prices for skilled tradesmen such as electricians and plumbers will increase as demand remains steady or rises and the number of suppliers decreases. For example, IBISWorld anticipates plumbing construction service prices to increase at an annualized 2.2 percent over the next three years. Thus, buyers are advised to lock in current prices, if possible.

Labor shortages will impact organizations on multiple fronts. Forward-thinking businesses will ensure they are compensating employees equitably to retain talent and attract workers as well as working with reliable vendors to avoid the pitfalls of work stoppages and delays related to shortages in labor.

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