How Companies Should Respond To The Wage Inflation Situation

An entrepreneur and investor. Co-founder at USEReady. attending Owner/President Management – Leadership Program at Harvard Business School

The Covid-19 pandemic has radically transformed the global economy and labor market. As a result of these changes, countries such as the U.S. are now experiencing significant wage inflation. Currently, many economic experts have suggested that the current ecosystem of wage inflation may be temporary. In reality, however, I believe that the wage inflation situation is permanent, systemic and in some ways contagious. Efforts to address ongoing wage inflation must account for these considerations.

Over the past decade, numerous companies have adopted business models that rely on paying their employees, primarily blue-collar workers, lower wages. Gig-economy platforms such as Uber, Lyft, Postmates and DoorDash have all established business models that classify their drivers and delivery people as independent contractors, compensate these individuals based on an on-demand usage model and enable companies to avoid providing these contractors with the benefits that white-collar, full-time employees receive. As a result of this business model, many gig employees have been working at discounted rates.

During the Covid-19 pandemic, the social and economic disparities between blue- and white-collar workers deepened. White-collar employers began paying their employees higher wages and offering remote work opportunities. Many blue-collar workers, on the other hand, were required to risk their health and safety to perform essential in-person services and obtained lower wages. During this pandemic, the industries that saw the highest turnover could not offer their employees opportunities to work remotely. As mass vaccination campaigns have begun, many nations have started reopening their economies. This has sparked increased demand for these blue-collar workers’ services, such as ride-hailing and food delivery services. However, as inflation rates have risen, the real wages of these blue-collar employees have decreased. As a result, many blue-collar workers have begun searching for opportunities that enable them to earn more money and offset the loss in real wages they have suffered. Many of these employees are not aiming to return to the gig economy or low-wage jobs. Instead, they are focusing on reskilling and upskilling to obtain positions that provide them with better pay, benefits and security.

One example of how this change is playing out at the lower end of the workforce is at Amazon fulfillment centers. In the state of New Jersey, Amazon pays its fulfillment center employees $15 per hour and offers them the same benefits as its full-time workers. The current federal minimum wage is $7.25 per hour. The employment opportunities at the Amazon fulfillment center are, therefore, more appealing than other lower-wage jobs, and workers seeking better benefits and higher incomes are seeking such jobs out. The U.S. government provided the population with robust unemployment benefits and numerous stimulus checks during the pandemic, sparking a high savings rate. I’ve observed that many employees have used these financial benefits to reskill to qualify for jobs with higher wages, which have increased in number as the country has reopened its economy.

As workers in the U.S. seek to reskill in the current economy, many are setting their sights on developing technical skills that will enable them to provide value in the technology sector. In particular, workers are focusing on cloud, data, artificial intelligence and machine learning, and cybersecurity. In these industries, however, demand outpaces supply in the labor market, resulting in unequal wages.

Many employees who started new jobs at the beginning of the pandemic have not fully integrated into their companies and their corporate cultures. Most of these employees have never met their colleagues and employers in person and, therefore, have minimal loyalty to these companies and are easy to recruit for new positions. Structural changes in the labor markets have also dealt a blow to employee retention. Increasingly, corporations are altering their salary standards to offer new employees higher wages. At times, these companies provide new employees higher salaries than they offer existing employees, sparking dissatisfaction among their current workforce and increasing turnover. If firms continue to improve the wages of incoming employees without adjusting the wages of their existing employees, it could make the current wage inflation situation permanent and further the great resignation.

A recent U.S. survey revealed that 50% of workers in the industry want to make a career change, and 51% of workers are looking for a new job. One example of this is in the IT sector in India. Companies such as Accenture, Infosys and Wipro face rising attrition rates, and more than 17% of employees at each of these firms resigned within the first 90 days of their jobs. Wage inflation becomes pervasive, systemic and contagious in this situation, and there is little incentive to address it head-on.

In order to retain talent and tackle ongoing mismatches between labor supply and demand, businesses have to pay higher wages in order to retain employees. Larger firms desperate for talent can consider passing this increased cost to consumers and investing in automation to boost productivity. In order to complete and retain employees, I believe smaller businesses must do the same. However, with smaller revenue pools, these companies will likely have to dip into their margins to pay these higher wages or risk going out of business, which could spark a vicious labor market cycle.

Firms can also consider focusing on culture, open communication, employee collaboration, location and timing flexibility, awards, recognitions, profit sharing, stock options, career mobility, opportunities to upskill, certification and higher education to improve retention. As another example, my company focuses on hiring recent graduates from colleges, providing them with rigorous training at USEReady University, which helps us scale and ensure quality.

As nations worldwide grapple with refueling their economies in the wake of the Covid-19 pandemic, many are struggling to get a hold of expanding wage inflation. These wage inflation issues are not temporary. Rather, they are systemic, pervasive and contagious and must be addressed more granularly. According to Allianz Chief Economic Advisor Mohamed El-Erian, “The characterization of inflation as transitory is probably the worst inflation call in the history of the Federal Reserve, and it results in a high probability of a policy mistake.”

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