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The “Wage Spiral”: It’s Real and Shouldn’t Be Ignored

The “Wage Spiral”: It’s Real and Shouldn’t Be Ignored

We’ve often discussed the promise – and the peril – of an economy that is functioning as ours is now. For the most part, industries across America are doing well. Unemployment is historically low. Consumer confidence is high. Anyone who wants a job can have one. And business is good. But there are certain ripple effects of this runaway-train economy that we must keep in mind. One called the “wage spiral” is largely being ignored by employers, and that ignorance is beginning to hamper businesses’ ability to take full advantage of this economy.

The so-called wage spiral is a phenomenon that is occurring throughout most industries. There are more open positions than there are people to fill them. That is especially true when it comes to openings in leadership roles, where employers are searching for highly-qualified individuals who are becoming harder and harder to find. This imbalance between supply and demand for qualified labor is driving the market price for these individuals rapidly upward. As employers enter into negotiations with new talent, they are being forced to increase salary offers in order to land their desired job candidate. A qualified candidate controls the process because they likely have multiple offers. They will get their higher wage elsewhere if not from your organization. And the wage spiral is on.

The impacts of the wage spiral are vast and concerning for employers. Budgets must be written with an expectation that the cost of a current position will likely go up – not down – if/when that position is filled with a new employee. In the past, organizations worked to reduce budget impact when filling open senior positions. Now, the wage spiral dictates that most employers will be spending more to hire new employees than they were paying the original worker.

Similarly, we often hear a hesitancy from employers to bring in new workers at higher rates of pay than their current, long-standing employees. This is a commendable approach, but it simply isn’t sustainable in our current economy if an organization wants to land the most talented people out there. Employers must be willing to pay new talent what it takes to land them – and that will often require higher pay than the position has historically demanded, higher wages than existing employees in similar roles, and less reliance on longevity-based compensation.

The wage spiral doesn’t exclusively apply to new hires. Existing employees will also benefit from the ultra-competitive environment and force employers beyond their comfort level. The best employees, especially those in senior positions, will be pursued by other organizations. Those competing job offers will be leveraged to push for higher wages from their current employer. And if organizations want to keep their most talented team members happy, they will pay them more. If not, they will lose them to a competitor and end up spending more to replace them anyway.

The wage spiral is real. It is creating massive budgeting headaches throughout the industry. It is resulting in unplanned turnover and urgent personnel needs in critically important positions. And it is not going away anytime soon. To adapt, employers can’t ignore the trend. They must adjust budgets accordingly and accept the hard truth that there is a price to pay for an economy this strong. We at Schaffer Associates are advising clients on a daily basis on how to structure their budgets, attract the best talent, and retain their critical personnel. Call us today.

Headquartered in Charlotte, North Carolina, Schaffer Associates is a national management consulting firm specializing in executive search and organizational strategies for the hardware, home improvement, building materials, and consumer products industries. As the premier management consulting firm serving the industry, we help build organizations and leadership teams that foster corporate growth and success well into the future.