The Economy is Bad so Why Are Employees Clamoring for More Money?

For many companies business is down and costs are up.

As a manager you may be spending hours crunching the numbers to figure out where you can cut expenses and how much you can raise your prices without losing your customers. The last thing you are prepared for is employees to start demanding pay increases. Surely your employees realize times are tough and they should be grateful just to have a job, right? Careful, you may be in for a big surprise if you do not build salary increases into your planning scenarios.

There are some obvious reasons why your employees may be asking for more money. The same rising costs you contend with in your business are also hitting workers’ pocketbooks. Rising fuel prices impact all aspects of workers’ budgets, from daily commutes to increased food prices. You certainly didn’t tell your employee to go buy that big SUV but now that gas prices have surpassed $4.00 a gallon you still need them to get to work and in order to do that they must fill the gas tank, particularly in areas without adequate public transportation or other viable alternatives.

The housing crisis may be just a statistic on the nightly news to some but in many American households it is a very personal financial emergency. The complexities of the current housing crisis will be analyzed and argued about for years to come. The issue from your employees’ perspective is that wages have not kept pace with either home ownership costs or the rental market. According to June 2008 information published by the California Department of Housing and Community Development a worker earning minimum wage would need to work 120 hours per week to afford an average two bedroom unit at $1249 per month. The 2008 California Family Self-Sufficiency Standard estimates a single person in Santa Barbara County must earn a minimum of $13.86 per hour and in San Luis Obispo County a minimum of $11.52 per hour just to cover the most basic costs of living. In Los Angeles County the minimum is $12.51 per hour and in San Francisco it is $12.17 per hour.

Health care costs are also rising at an alarming rate both for employers faced with ever increasing costs to insure employees and employees who often must pick up a larger share and pay more out-of-pocket to maintain coverage. In a June 17, 2008 article the New York Times quoted Federal Reserve Chairman Ben Bernanke speaking before a Senate panel, “Improving the performance of our health care system is without a doubt one of the most important challenges our nation faces”.

There are also some less obvious but equally important reasons employers may find themselves facing more pressure to give wage increases to employees. Overall the demand for skilled workers remains strong. There are certainly downturns in some industries, most visibly construction and housing, however overall the unemployment rate remains relatively low in many regions. While the May unemployment data for California shows an average rate of 6.5% many areas still have very low unemployment rates. The unemployment rate for San Luis Obispo County in May was 5.2% and Santa Barbara County was 4.6%, both below the National rate of 5.5%. In San Francisco it was 4.9% with Los Angeles County coming in closest to the statewide average at 6.4%.

The labor pool is also changing rapidly. Baby boomers are set to retire in record numbers which will leave many industries scrambling to replace skilled workers. Estimates of the number of retirees and the associated brain drain from the economy vary widely. Most experts agree it will have a significant impact on the economy worldwide and for many industries a significant shortage of skilled workers is predicted. According to an April 2008 Sacramento Bee Article written by Daniel Weintraub,

At times like this it can be tempting to conclude that California’s economy is falling apart, that all the good jobs are gone and our young people will be forced to fight over a few low-paying positions in the service sector. But as bleak as things look today, and they may well get worse in the months ahead, the long term is likely to be very different. Within a few years, in fact, the big story in California might be a shortage of skilled workers, not a shortage of jobs for them to fill.

Employers must maintain a long term perspective if they are to retain their most skilled employees who will be in ever increasing demand as the economy begins to recover. The Economic Research Institute notes that employers are expected to give increases for 2009 of around 4% but that rate may vary significantly depending on the industry and the demand for labor and skills within their industry.

Adding to labor market pressures, fewer workers are willing to relocate to new areas, particularly if they own a home they would need to sell in this uncertain real estate market. If you are in an industry that requires a skilled workforce you may face added wage pressures from headhunters calling on your employees with tempting offers. The Federal Reserve Beige Book for June 2008 acknowledged that wage pressures were limited in many sectors, “However, wage increases remained rapid for skilled workers in selected sectors, such as computer services.” DICE Holdings specializes in technology and financial service sector recruiting and CEO Scot Melland had this to say about the results of a recent DICE survey, “The weakness in the employment market is not impacting compensation. In many categories this is still a tight labor market and companies realize they have to pay competitive wages and take into account the cost of living.”

The experience of an economic downturn may be a new one for many workers who have never fully experienced a recession. Even average income working Americans have grown accustomed to a lifestyle that includes a lot of luxuries, both big and small. When everything from a fast food dinner to postponing the purchase of a new car begins to feel like deprivation employees will look to close the economic gap with higher salaries.

What does all of this mean for employers? First, be conscious of wage pressures so you understand what is happening in your industry. Don’t just assume your employees will be willing to stay put without raises, especially if they have high demand skills. Make sure any financial planning you do takes realistic wage increases in account. If raises are not an option it may be time go get creative. Companies experiencing financial strain may need to try other ways to help employees face rising costs and maintain employee morale. Perhaps employees can work a 4 day schedule to reduce commuting expenses or telecommute. (see article by Reed Jorgenson on the legal issues involved with alternative workweek schedules)

There is no set formula for addressing wage issues but a little research and planning are the best way to be prepared to address the issue with employees.

One Comment

  1. I hire people all over the country, including California, and we I have encountered many of these problems, particularly in interstate relocation hires. The difficulty in the mortgage market affects not only the employee’s ability to sell their home, but also company hire and relocation costs, since we usually end up paying the difference if the home sells for less than was paid.

    Interesting blog, I do notice that though we are giving the same average increase amounts as we have in the past, employees do seem much less satisfied with what they receive.

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