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Tight Labor Market. Really?

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Jeff Snell | 05/04/2023

The labor market is constantly evolving, and it is not uncommon for there to be periods where labor is difficult to attract and retain, but how do you respond?

Definitions:



A tight labor market is one in which there are more jobs than qualified candidates available to fill them. Backlog is committed work from clients that has to wait because your staff is overextended.

This is the classic case of demand exceeding supply. Backlog is the result of demand exceeding supply. This can put pressure on businesses to increase wages to attract and retain labor. But the question is, is it justified to pay higher wages in a tight labor market when your business has more backlog than it can service?

The answer is logically yes, and in this blog, we will explore why. When a business has more backlog than it can service, it defers profits into future periods and can result in lost revenue, slowed customer acquisition (or missed opportunities), and decreased profits. This is a critical situation that should be addressed immediately. This is the time to work “on” your business rather than “in” your business.

Paying higher wages in a tight labor market can help businesses resolve these issues quickly. Firstly, offering higher wages can help businesses attract and retain the best talent. With fewer viable candidates available in the market, businesses need to offer competitive wages to attract labor. By doing so, businesses can increase their chances of hiring people - and higher quality people, which can lead to faster clearing of backlog. Secondly, higher wages can lead to increased productivity. When employees are paid more, they are more likely to feel valued and motivated to work harder. This motivation can reflect in their work quality and efficiency, resulting in the ability to clear backlog faster as well. Thirdly, by paying higher wages, businesses can reduce the turnover rate. High turnover rates increase backlog and result in lost revenue by reducing available labor and incremental training requirements. By retaining employees, businesses can ensure that they have a skilled workforce available to tackle their backlog and meet the demand. Lastly, paying higher wages is a way to show employees that the business cares about their welfare and is willing to reward them for their hard work. This action can lead to a more positive work culture, employee loyalty, and improved employee morale, all of which can ultimately help reduce backlog and increase profit.

All of my manufacturing clients currently cite chronic labor shortages. But, it is my opinion that the labor “shortage” is actually the result of perceived pay gaps between employers and potential employees – willingness to pay vs. willingness to work. My clients report that labor is available, but at rates they are uncomfortable paying. The reality is that labor cost is simply a cost of doing business – the same as rent, cost of materials etc. You wouldn’t turn down a project because the cost of materials increases. You pass that incremental cost on to the client. You aren’t going to lose the client because the same costs are impacting your competition as well or they will expend their limited labor resources on low or no-margin projects. The same is true of labor costs. Business owners should stop concerning themselves with higher salaries and hourly wages and simply pay more and concurrently charge more which results in a win-win-win for your company, your employees, and your clients.

In conclusion, time and money fix all problems as they say and labor cost is simply a money challenge. It is justified to pay higher wages in a tight labor market when your business has more backlog than it can serve to expedite profits. Not to is literally leaving money on the table which costs far more in profits and lost opportunities. By doing so, businesses can attract the best talent, increase productivity, reduce turnover rates, and improve employee morale. All of these factors can help resolve backlog issues quickly and ensure that business operations run smoothly.