Main Street Hiring, Firing, and Pay Strategies

by Ana Lopez

In December, 41% of small business owners reported at least one position that was difficult to fill and 17% planned to hire someone to address the large backlog of vacancies. A total of 55 percent said they were hiring or trying to hire in December. Ninety-three percent of them reported few or no qualified applicants for the positions they were trying to fill. The reality of the workforce situation seems to be sinking in as only 41% of those with skilled vacancies intend to succeed and increase employment, about the same for companies with unskilled vacancies. Seasonally adjusted, 13% reported employment gains in December compared to 12% who reported a decline, the first month since February that increases outpaced declines.

Increasing pay is the most commonly used strategy to attract and retain employees. Of companies with skilled openings, 53% have increased compensation, while 64% of companies with both types of openings have primarily relied on pay increases to hire desirable employees. Half of companies with unskilled openings have also recently increased compensation. The only cuts reported were at companies with only unskilled vacancies. It takes ubiquitous wage cuts to allow companies to actually lower selling prices, which is unlikely in this environment. Slowing price increases will lower inflation but not restore the purchasing power of income and lost savings since 2020. Only falls in the prices of goods and services can do that, not a fall in the rate of price rises.

With few alternatives available, a net 27% plan to increase compensation in the coming months, and less than 10% plan any reductions. So the compensation costs will continue to rise, as will the selling prices to cover those costs. Nearly half (47%) of companies with both types of openings plan to increase compensation, 4% with “a lot”. Of the companies with just-skilled openings, 42% are planning wage increases. At close range, 39% of companies with unskilled openings plan walks. Even 26% of those without openings plan to increase compensation.

At this point, it is clear that increasing compensation is the most important strategy (see previous NFIB reports on Covid for other strategies used) to address the shortage of good employees and qualified applicants. There have been some pay cuts, but they are negligible. It will not be easy to get labor costs under control in the future. When gas prices or energy prices fall, or supplies and supplies become cheaper because suppliers have lowered their prices, input costs for small businesses will fall. But employees are unlikely to announce that their services are now cheaper. This will make labor costs “sticky”, only adjustable by reducing employment, while the remaining workers pick up the slack (for example, an increase in productivity and a decrease in unit labor costs). This is the part of the inflation battle that the Fed is concerned about, the rising unemployment.

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