How much compensation is necessary to attract employees? Experts suggest much less today than at any time in recent history.
Budgets and human resources strategies shaped by the tight labor market of the late 1990s have outlived their utility. CFOs must act now to realign policies with reality.
When the war-for-talent mentality arose, the economy was generating 300,000 to 400,000 new jobs every month and labor markets were tightening for almost every occupation. Unemployment dropped to 3.8 percent in April 2000, signaling full employment. Companies competed for "employer of choice" status by recasting work environments and boosting salaries and benefits.
Less than a year later, the economy started to shed jobs almost as quickly as it had added them. Between the April 2000 employment peak and March 2003, 2 million jobs disappeared. Now 15 million workers are unemployed or underemployed. "We've seen a cosmic shift," says Alan Johnson, managing director of Johnson Associates Inc., a New York City-based consulting firm. "In the late 1990s, we went from the view that people are reasonably fungible to the idea that 'people are our only asset.' It was overblown. And now, continued talk of a war for talent is like stepping into a time warp. Companies are inundated with resumes, and that's not going to change anytime soon." It's time to scrutinize pay and staffing levels and upgrade talent, he says.
For people in the human resources management industry, the war for talent was a good thing. With companies' HR focus squarely fixed on recruiting and retaining scarce employees, the key proponents of the war mentality -- recruiting firms, staffing agencies and consulting companies -- made a lot of money, and human resources departments watched their status rise.
Many in the field of HR management acknowledge that the economic downturn has cooled labor markets, but they insist that underlying demographic trends point to new labor shortages on the horizon. The hiring challenges of the late '90s will resurface as baby boomers begin to retire, so the scarcity mind-set and the policies it generated are still appropriate, they argue. John A. Challenger, CEO of Challenger, Gray & Christmas Inc., an outplacement firm based in Chicago, quips that future labor shortages will be so acute that "companies may become the leading proponents for the advancement of human cloning."
Talk of the war for talent continues, Johnson says, because "it is now part of the common mythology. It has become an accepted truth that people don't question anymore. Consultants obviously have an interest in keeping the myth alive. And human resources has not adjusted its approach in the face of new realities. Human resources is usually quite reactive, and that's what we're seeing here. The argument that baby boomer retirements will create dire labor shortages ignores technological improvements and efficiencies and the dramatic surplus of labor we see today."
The Demographic Myth
Although proponents of the war for talent insist that demographic trends portend looming shortages, the hard data does not support that assertion. The U.S. Bureau of Labor Statistics' employment and labor force projections indicate a comfortable match between the number of jobs that will be created and the number of available workers through 2010. Even forecasts pushed out to 2050 show no cause for widespread concern. Jon Sargent, an economist in the Bureau of Labor Statistics' office of occupational statistics and employment projections in Washington, D.C., confirms that "there may be some fields or occupations where there could be some shortages, but there's no reason to believe that shortages will be widespread."
Moreover, despite all the talk about mass retirements, some preliminary evidence indicates that baby-boomer workers may not leave the work force on schedule. Labor force participation rates generally decline in recessions; since 2000, they have fallen for every age group except workers over 55. For older employees, the participation rate is actually rising. This trend suggests that baby boomers may be postponing their retirement because of greatly diminished retirement savings.
Richard J. DeKaser, senior vice president and chief economist for National City Corp., a Cleveland-based financial services holding company, does not buy the argument that demographic changes will create intense labor shortages. "It's difficult for economists to use the word 'shortage,' because when people say they can't get the labor they need, they mean that they can't get it at the price they want to pay. Even if we exhausted the existing labor supply, the labor force participation rate would rise because baby boomers could be persuaded -- at some price -- to remain in the labor market. A better way to describe the situation is that there may be upward pressure on compensation for certain occupations."
Surplus Labor
Predictions of ongoing labor shortfalls also fail to account for the huge labor surplus that has accumulated over the past two years and the deep, sustained change in business conditions that will be required to reabsorb millions of unemployed and underemployed workers into the system. Economists generally agree that economic growth must exceed 3 percent for unemployment to fall. GDP growth has not reached that level since 2000. And as long as productivity growth continues to outpace economic growth, no new workers will be needed.
The current level of unemployment in the United States is distinctive in three ways: First, even highly skilled and experienced workers are jobless. Second, the duration of unemployment for most workers is relatively long. And third, there is no job growth at all. The economy stopped creating jobs on a consistent basis in March 2001. Johnson believes that the massive loss of jobs since then is the result of both the economic downturn and the technological improvements of the past decade.
"In the 1990s, we invested billions in technology and systems, but we underestimated the lag time for fully employing that technology," Johnson says. "Now we're seeing the results of technological improvements, and many of the jobs that have disappeared are not just temporary layoffs but jobs that we've lost forever. You don't need as many middle managers when you have systems that share data and information. The middle of the organization is under dramatic pressure."
DeKaser adds, "The economy as a whole has a great deal of slack in the majority of its labor markets, and even in many skilled occupations, the unemployment rate has risen." He notes that unemployment rose sharply after the September 11 terrorist attacks, then dropped in the summer of 2002, only to rise again in September 2002 because of concerns about the impending war with Iraq. Other economic indica-tors, including capital goods spending, turned downward at precisely the same time. "With the passing of the war, we should see hiring begin to improve," DeKaser says.
Wage Slide
High unemployment is pushing down wages and salaries, the key component in consumer spending levels. Wage increases slowed in 2001 but rose by a modest 3.5 percent in 2002, only to fall again in the early months of this year. Hourly earnings were unchanged in January 2003, the first month in 10 years that they have not increased. Year-over-year wage growth has slowed to 2.8 percent, the lowest rate in eight years and barely higher than inflation.
"CFOs are likely to see labor market conditions over the course of the next year that are not dramatically different from what we see today, with perhaps a gradual tightening, but by no means creating any difficulty for obtaining labor of almost all sorts," DeKaser says. "Beyond that, there will be a gradual tightening as the unemployment rate drifts down and negotiating strength moves back toward labor. The block of unutilized labor we have now should be absorbed toward the end of 2004."
Johnson believes that it could take three to five years before unemployment declines and wages rise again. "Given the reality of surplus labor, including talented people going jobless, wages will be stagnant for the foreseeable future," he says. "CFOs will be able to hire talented people at an affordable price that they could not get in the past." The consequence of not adjusting to current labor market realities, says Johnson, "is that you increase your costs." He adds, "In many cases, it's time for the CFO to push the conventional wisdom about how much pay and what kind of benefits are really needed to bring people in."
Opportunities in Slack MarketsSoft labor markets create a rash of opportunities for adjusting staffing levels and compensation. "CFOs need to go to HR and review staffing and pay levels," says Alan Johnson, managing director of Johnson Associates Inc., a New York City consulting firm. The staffing-policy review should become an ongoing process that includes the following steps:
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