A mixture of increased vaccination rates, fiscal stimulus, and the relaxation of business restrictions is leading to increased spending throughout the U.S. However, businesses are struggling to keep up with the increased demand. And one of their largest headaches right now is a lack of workers.

There is a shortage of workers

The Labor Department reported on May 13^th that jobless claims for the prior week dropped to 473,000. This is the lowest level since March 2020, when the pandemic triggered widespread job losses. This indicates that employers are retaining more of their workers.

However, the April jobs report showed that U.S. employers added only 266,000 jobs when economists were forecasting that one million jobs would be added. And it is not due to a lack of available positions.

U.S. job openings have already surged back to pre-pandemic levels, even though there are around eight million fewer jobs in our economy now. The National Federation of Independent Business (a small business trade group) surveyed companies and found that 42% of them have at least one open position that they are struggling to fill. This is the highest level ever reported.

Restaurants and gyms are reopening, but they are both having issues finding workers. Manufacturers, live-event coordinators, and many others are experiencing a tight labor market as well.

What is causing the disconnect between high labor demand and low labor supply? Economists point to several contributing factors: individuals’ concern about contracting COVID-19, workers’ inability to access childcare due to school closures, and expanded unemployment benefits.

These factors are expected to ease somewhat by the fall. A larger percentage of the population will be vaccinated, more schools will reopen, and the supplemental jobless benefits will end in September. In the meantime, expect employers to increase wages to retain current employees and entice new workers. We are already seeing signs of this happening.

Employers are offering more incentives for workers

Amazon.com Inc. announced that it will hire 75,000 more workers and offer singing bonuses of $1,000 in select locations. Amazon also stated that its open positions have an average pay of $17 per hour, instead of the usual $15 per hour. In April, they announced that they would raise pay for more than 500,000 hourly employees, awarding pay raises of between 50 cents and $3 per hour.

McDonald’s Corp. plans to hire 10,000 new employees at company-owned restaurants in the next 3 months and to raise pay at those locations. The company also said that it would raise wages by an average of 10% for more than 36,500 hourly workers at company-owned stores over the next few months. This is a fraction of the total McDonald’s stores, 95% of which are owned by franchisees. But the franchisees are making moves to increase pay as well.

Fast-food operators, like Jimmy John’s Gourmet Sandwiches, are offering signing bonuses for new hires. Chipotle Mexican Grill is offering free college tuition after a recruit has completed their first 4 months, if they work at least 15 hours a week. Taco Bell is offerings its company-store managers paid family leave. Darden Restaurants Inc., which operates multiple restaurant chains (including Olive Garden and LongHorn Steakhouse) is raising wages to fill open positions. Applebee’s, KFC, and other restaurant chains are all expecting to hire tens of thousands of workers in the coming months as more customers return to their dining rooms.

Domino’s Pizza is trying to hire more delivery drivers. The chain wants to keep drivers in their cars more by increasing the number of deliveries per hour, which allows them to earn higher pay. J.B. Hunt Transport Services is attracting and retaining truck drivers by increasing wages and benefits. Their operating chief Nicholas Hobbs says that it has been the most challenged driver market in his 37-year career.

And demand is not just high for lower-wage workers. Demand is also high for highly skilled workers, which has led some companies to take the training of their workforce into their own hands.

“Reskilling” is an option

Some companies are addressing the shortage of skilled workers by training their own employees for positions for which they have no background. This process is known as “reskilling”.

For example, there is shortage of computer scientists and engineers and those with digital skills, and this is leading some companies to fill the void from within their own organization. Levi Strauss & Co. has started a machine learning bootcamp that will train an initial cohort of 43 employees with no previous coding or statistics experience. The cohort was chosen for their problem-solving acumen through a three-month interview process that had more than 350 applicants. Demand was so strong that Levi’s is planning a second boot camp later this year.

Verizon was forced to close most of its retail stores in the wake of the pandemic. The company retrained 20,000 employees for other positions, including customer service and sales. It intends to train 100,000 employees this year so that they are ready for the next generation of wireless technology, 5G.

According to a 2019 report from McKinsey & Co., the cost of replacing an employee can be 20% to 30% of an annual salary. Reskilling an employee costs less than 10% of an annual salary on average. For this reason, combined with the e-commerce-based disruption of the pandemic, many major retailers are pursuing some form of reskilling.

Labor market whiplash: were the layoffs worth it?

The pandemic last year caused both demand issues and supply issues. Many companies were forced to cut costs where they could. Unfortunately for many workers, labor is generally a company’s most expensive input. The workforces of many businesses have been reduced. (Other businesses have simply failed.) But now that the economy is roaring back to life, many businesses are having trouble finding the workers to meet the demand.

How did those layoffs affect company profitability in the big picture? Did companies come out ahead by laying off their workers? Or did the layoffs allow a short-term increase in profit last year (by reducing costs) that has now converted into a burden of increased costs necessary to rebuild their workforce?

It seems that the fundamental issue here is how skilled do your employees need to be? If your employees need to be highly skilled or specialized, then replacing them is generally more expensive because they are generally in shorter supply. It would make sense to try to retain your highly skilled labor. If possible.

Because this basic logic does have a limiting factor: how much capital do you have? Specifically, exactly how long can you retain your workforce with your capital? A business that is not producing profits will need to have capital to shoulder the expenses of these highly skilled workers. Or the firm will have to find a different, and profitable, task for them to work on.

Verizon was able to retrain its workers for other positions. But it also had an incentive to have a skilled workforce in the coming years that is 5G-ready. It did not want to have to build this workforce from scratch after the pandemic subsided. Strategic considerations led it to retain its employees.

This course of action was simply not possible for all businesses. As all consultants know, it depends. It depends on the specifics of your industry, the skill level of your workforce, your available capital, and whether there are readily available alternatives for your workforce. Additionally, you must consider your firm’s business strategy. You must know what your destination is before you can draw up possible routes to get there.

I am not an expert on the labor market, but it seems that airlines that furloughed or laid off pilots can be fairly confident that their pilots will return once business picks back up and airlines begin hiring again. Not only are commercial pilots highly compensated, but I would assume that an inherent love of flying is common. Switching to another career is probably less likely. (Although a commercial pilot could potentially start flying private, depending on their incentives.) Depending on how many pilots remain available in the commercial pool, layoffs at the airlines may have been the profitable move.

On the other hand, a company like Disney, which announced plans last fall to cut over 32,000 jobs through the first half of 2021 (mostly in its theme-park division), may feel more pressure from the labor market crunch. Many of its former employees no doubt loved their jobs. But love or loyalty for a former employer may not translate into waiting for them to rehire when there are so many other tempting job opportunities available in a worker’s job market. Of course, I assume that most theme-park employees will not have training requirements as arduous and lengthy (and expensive) as a commercial airline pilot. Disney may have no issue finding enough trainees and getting them up to speed quickly. But they may find that they will have to offer higher wages, just like most other employers.

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