Will Labor Cost Increases Reduce Soon?
Business owners and managers are being confronted with upward labor cost pressures, and for many it appears there is no end in sight for these increases. To evaluate the impact of labor issues on financial performance, let’s first assess the current labor situation from a supply and demand perspective. Key statistics to evaluate include the unemployment rate for the US and by state, the labor participation rate, and the unemployment rate by educational level achieved.
The civilian unemployment rate has been at 3.6% for March and April 2022.
The labor participation rate in April 2022 was 62.2%, compared to the pre-pandemic level of 63.4% in February of 2020. The overall labor participation rate had been at 66% or higher until the 2008 recession. Since that recession the labor participation dropped to a September 2015 low of 62.4%, and then began increasing to the pre-pandemic level of 63.4%. The April rate is below the pre-pandemic lowest levels.
The unemployment rates by state vary from the 5.3% unemployment rate in New Mexico to the 1.9% in Utah and Nebraska.
The potential skill gap remains problematic for employers. The April 2022 unemployment rate for individuals with a bachelor’s degree or higher is 2.0%, which is just over the 1.9% February 2020 pre-pandemic level. The rate for high school graduates is 3.8%, compared to the pre-pandemic low of 3.5% in September 2019.
Because employers are finding the labor market to be very tight, competition for resources means prices are increasing. On a quarterly basis the Bureau of Labor Statistics publishes an Employment Cost Index. The Q1 2022 index was published last month. The 12 month change in employment cost in the private sector is reported to be 5.0%. Starting in July of 2021, the 12 month change has been the highest since its previous peak of 3.1% in 2008.
Both labor and benefits have been contributing to labor cost increases. Private industry wages and salaries are up 5.0% and benefits are up 4.1%.
With labor being one of largest expense categories on most company financial statements, these price increases have a material effect on the performance of companies. Many retailers reported their earnings last week, and attributed performance misses to increased costs for labor as well as other expense categories. For example, Walmart reported a 25% drop in quarterly earnings and cut its full year profit outlook, attributing the changes to increased fuel prices, increased labor costs, and the impact of inflation on the purchasing power of consumers.
Irrespective of the geographic location, the skill set, or the industry, labor costs are increasing. The April data shows hourly wage increases from April 2021 to April 2022 have increased between 2.6% for the Information sector to 7.1% for transportation & warehousing and 11.0% for leisure and hospitality.
Businesses need to evaluate the labor and benefits costs and identify ways to maintain strong employees while not sending the company’s performance into a tailspin.
Businesses have also been confronted with demands by employees to continue to work from home. Employers are working on trade-offs between in person and remote work, and rate of pay. Companies have reported losing qualified employees to competitors who will allow full or part time remote work. Statista recently published some encouraging data for businesses who need employees to return to the office. The number of employed people who worked remotely in the past four weeks has dropped from 35.4% in May of 2020 to 7.7% in April 2022.
The need to monitor and track employee counts and labor costs is critical today. In addition to regular time, it is important to track overtime and other performance spiffs. Looking at labor costs per unit sold or per dollar of sales will be key.
Reviewing cost benefit analysis for automation will be an area to consider as a way to improve the financial performance of the business and reduce the risk tied to hiring adequate skilled staff. While this analysis may not have an immediate impact, it may help a business determine ways to reduce performance risk.
Evaluating offshore or near shore sourcing for certain tasks will continue to be an area to evaluate. This is even more interesting when considering the pressures for remote work and the desire of employees not to go to the office daily.
Overall, creative solutions to staffing are going to be necessary today and into the future. There will not be a one size fits all answer to this problem. Each business will need to track its own labor cost levels and work to reduce the impact of these upward pressures on operating costs. With inflation, there may be an ability to increase prices, but there has recently been more pressure to maintain existing pricing and less willingness by customers to accept price increases.