Why aren't wages rising? An analysis
The economy has held steady for years and unemployment remains low, yet projected market responses have not materialized. So what's going on?
Are your employees getting raises in 2019? Chances are good that they are — but at a standard 3% rate, even as the historically low unemployment rate pushes the competition for talent to new heights.
This pattern has confounded economists for some time. "We continue to be surprised that [employers] are not changing the budget," Mary Ann Sardone, partner and North America workforce reward practice leader at Mercer, told HR Dive in an interview. Projections for salary increases in 2019 remain around the 2.8-3.0% range. Willis Towers Watson projects a slightly more optimistic trend at 3.1%, but few reports signal much in the way of significant change.
Data from the Bureau of Labor Statistics (BLS) shows continued growth in total compensation year-over-year, but that accounts for benefit spend as well, which has steadily increased.
The economy has held steady for years and the market continues to tighten, yet massive market responses have not materialized. So what's going on?
The real deal
Recent optimism has led some to predict that wages may finally be rising — but the stats, frankly, still don't line up.
While wages do continue to inch up, they're merely keeping pace with consumer prices, Sardone said, so employees may not be feeling those increases. A recent survey from Aon showed that employees' total earning opportunity — potential earnings between salary and variable pay — has decreased over the past three years, as well.
This phenomenon creates an interesting environment for employers, though much depends on location, industry and employer size. Some are targeting investments to "hot" skill areas such as technology talent, Sandra McLellan, director of the North America Rewards Practice at Willis Towers Watson, told HR Dive via email. "They are also focusing on changing or introducing annual bonus or incentive plans to focus on cash awards for their top performers," she added.
Smaller and medium-sized businesses have been quicker to increase wages, Tim Gates, senior regional vice president at Adecco, told HR Dive in an interview. That's partly because it's "easier to look at things on a case-by-case basis" when the organization is smaller. Large organizations with 1,000 people working in one job title, for example, would see "significant impact" from increasing those wages.
And that impact gets at the real fear behind why employers have resisted large wage increases, generally, Gates said: "What if we react too fast, the market loosens and suddenly we are overpaying?"
Economic uncertainty and a volatile political environment have added to employers' anxieties, Sardone said. Many are loathe to do anything wild to shift fixed costs in accordance to that.
But there are other factors at play, too. Many older, more experienced workers are retiring and leaving room for younger people with fewer skills to take positions — and be paid less, Gates said. And with the talent market being what it is, companies may begin to rethink talent budgets entirely, Sardone said.
"They may realize they need to do more," Sardone said. Mercer often rechecks at the end of the year to see if employers adjust budgets in response to the market, but as of now, budgets appear steady.
Globalization and the contingent workforce
Another big reason U.S. labor budgets remain largely unchanged? Employers are more willing to look outside the traditional box for workers — be it outside the U.S. or to contingent talent. Unprecedented globalization of business has shifted how employers conceptualize talent pools.
"People can be hired and work from pretty much any location," Sardone said. "So when we look at the U.S. labor market, it's defined by U.S. borders. But more and more companies are seeking talent pools elsewhere in the world, so increasing budgets in the U.S. may not make much sense."
Wages for equally skilled workers outside the U.S. may be lower, which is a boon for employers. While some negative connotations still exist around "outsourcing" talent, it is now a key part of doing business for companies and customers alike that acceptance has spread, Sardone said; "It's a reality."
The continued growth of the contingent workforce may also have a long-term affect on wages. "It's a big impact," Gates said of the gig economy. "If there isn't a longer-term goal, it really comes down to the primary way to entice that individual, which is wages." Wages are, at least, often where conversations begin with contract workers — but the wages are in a completely different context compared to budgeting for an employee.
Employers have been used to a persistent workforce of traditional employees, but as pockets of openings develop, some are rethinking whether full-time hires are necessary, Sardone said. And that certainly contributes to the hesitance to raise wages for employees.
What about job hoppers?
"Many organizations are fearful of this," Sardone said. "It's happening to them. But perhaps the future of our workforce needs to be different anyway." Acceptance of some talent leakage has become more commonplace, especially as the market continues to buzz. But this situation puts pressure on employers to up their retention game.
"Organizations have to be really smart about what they offer," Gates said. "You can't stop recruiting someone to your organization. You have to retain them."
Talented workers will have plenty of options and opportunities, and if salary isn't a lever an organization can pull, it may need to get creative. Employers have to know what they need and remain constantly "out there" in the market, Gates said. Any company caught flat footed by job-hopping will truly struggle in the market.
"Some of the ways they need to do that is to better simulate the experience an employee has externally," McLellan said. Social media networks, for example, can provide opportunities for employees to find internal job opportunities and allow employers to reconsider salary budget allocation to better reward that kind of career development. "The pressure to get this right is only going to increase for employers."
The changing nature of total comp
A perceived inflexibility on salary has pushed some organizations to switch up their total compensation packages to encourage productivity. Gates spoke of some organizations allowing people to leave early once quotas were met and still paying them for a full shift, for example.
Employers have been increasingly willing to offer new and innovative benefits to better accommodate employees, including lactation benefits and development programs. But companies have to be careful not to put all their eggs in one basket and, instead, need to focus on which benefits will actually serve their population.
"If it is used in lieu of comp, it's less effective," Sardone said of such benefits. "It's great to have those things, but if you aren't paying enough, it's not effective."
But such calculations are, more or less, the reality. The push for pay equity has already forced employers to reconsider how they think about the annual salary increase, leaving little room to pay for performance in base pay, Sardone added. The Aon survey supports this conclusion; variable pay spending dropped from 12.7% in 2017 to 12.5% this year, and is projected to fall to 12.1% next year.
Striking that fine balance between salary and benefits may be a familiar struggle. Employees continue to balance work experiences with compensation, and an employer that offers a productive, healthy culture has weight in the current market.
"This experience in aggregate is the full story of why employees join and stay at a company," McLellan said. "It may take work to get that offering right, but in the end, employers are competing based on the total experience they offer to their employees."
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