Wichita State business research center takes look at labor market trends | Area

The three driving forces behind employers experiencing a lack of qualified candidates are demographics, an overly heated economy and friction within the labor market. First, U.S. population growth, along with immigration, has restricted the labor supply. Within the demographic shift, which has been well published, are Baby Boomer exits, leaving behind a labor gap.

The second thing to consider is the economic state of the economy. After four years and a pandemic, we faintly remember what the economy was like in 2018. It is important to note that the economy was nearing full capacity. The pandemic itself paused parts of the economy but was not a correction within the market. With the injection of federal funds, the economy bounced back quickly, returning us to a heated economy where firms have already soaked up all of the high, moderate and low-quality labor. When we look at the percentage of the employed population (employment-population ratio), Kansas returned to its pre-pandemic typical levels in mid-2021. Thus, in 2022 we see increased competition among employers for remaining labor.

The third perspective, which doesn’t seem to get much attention, is that there are lots of pressure on the labor market. Firms have changed products and processes, requiring a different combination of occupations, skills and knowledge to produce goods and services. That sudden shift in demand, along with increased home prices, mortgage rates, cost of education, uncertainty, and the time needed to reskill adds friction to the labor market’s ability to adapt to demand. However, the reality is the labor market is responding quickly, and it will take years for households to move and gain the education and experience that firms are demanding today.

What are the main factors that are influencing the high turnover rates in the labor market?

Now that the economy has returned to full employment and demand for labor is higher than supply, the market power has shifted. The market power is akin to housing, which moves between buyers and sellers. The difference is that firms have had monopsonistic power for over a decade, and human resource teams are uncertain about how to react to this paradigm shift.

From the household’s perspective, labor opportunity hasn’t been this bright in a long time. When evaluating one’s skills and experience along with the work environment and compensation, a share of the labor market is using the increased power to move up in their career, creating a high turnover effect.

What will be the economic impact, if any, of this trend?

The impact from the household perspective is positive for the short and long run, as there doesn’t appear to be any significant policy or structural changes on the current horizon that will reduce demand and the subsequent power they currently have over firms. The upside is that there will likely be upward mobility, where people in low and moderately-skilled jobs will have an opportunity to move up and gain experience and increased income.

One might expect that the impact of unfilled positions would have a negative effect on the firm. In the short run, some businesses will experience hardship because they cannot find the labor to fill the demand; however, we might need to look at the labor market differently since we are at full employment. It is not that households are not willing to work; they are willing, provided that the compensation and environment align with their expectations.

The impact on businesses is they need to shift their perspective. Suppose labor remains a critical component of competitiveness. In that case, they need to increase compensation to attract employees, train lower-skilled staff to allow for upward mobility, or add technology to increase the productivity of the current employees. These efforts will cut into corporate profits, which will likely shake out weaker players and industries.

How can employers attract and retain employees during this troubling period?

Manufacturing and service-related sectors have dramatically changed their compensation packages over the last two years. Although there has been a reluctance to continue that pace of change with the high level of uncertainty, the pressure will likely continue into 2023 and beyond. Firms in Kansas have shared that the return on investment to attract labor in a tight market had decreasing returns over the last six months. The head-to-head competition with larger firms or markets made it cost-prohibitive; instead, businesses have found it more cost-effective to focus on improving their internal environment and making technology investments.

In your opinion, will this imbalance in the labor market continue to be an issue throughout all of 2022 or will it get solved faster?

A tight labor market is likely here to stay, meaning that searching for and retaining labor will remain difficult for some time in the future; however, three things will help relieve struggling employers. First, a recession will take some pressure off of the labor market. Second, the labor market will continue to adapt by moving and gaining more education. Third, firms will be forced to invest in technology and utilize labor more efficiently than they did in the past.