Where Have All of the Candidates Gone?

Economic Zero Unemployment

By Bob Floreak, MSIR

When I started college many years ago my original major was Economics. One of my professors questioned my decision to major in the field and suggested that Accounting would be a more practical major.  Even he questioned the practical application of Economics to the everyday work world and convinced me that every business needs an accountant, but not many need an economist.

While what he said is true, most businesses now are challenged by a simple economic principle impacting our country; the demand for labor is now starting to outpace the supply. It was that same professor that introduced me to the concept that “4.0% aggregate unemployment is the equivalent of full employment or Economic Zero.   While there will always be some unemployment in the marketplace due to factors such as seasonal employment, job relocations, restructuring, and individual business downturns/closures those transitions are part of the normal course of business and expected in any marketplace.

Last month, the US Department of Labor announced that the nationwide unemployment rate dropped to 3.8% nationwide; the lowest numbers that we have seen since the year 2000 and approaching lows set in 1969 of 3.4%.   While its true that the Labor Participation Rate is also relatively low (less people looking for jobs) due to Baby Boomers retiring and people dropping out of the workforce; the numbers speak for themselves.  We have more jobs than people to fill them.

Flash back again to Econ class:  What happens when demand outpaces supply?

1. Prices go up
2. The marketplace looks for substitutes
3. If the undersupply continues, the market may overheat

So, what can businesses expect if the general business marketplace continues to thrive and the demand for labor outpaces supply?

1. Wage inflation. Businesses may need to pay more for the same performance output OR pay the same for employees that perform at a lower competency level.
2. Companies will look at their overall cost of labor and seek alternatives to their current wage structure through increased emphasis on pay-for-performance, rebalancing of labor costs through organizational redesign, outsourcing, and wherever possible, replacing people with automation.
3. Companies themselves may overheat.  While consumer or client demand for their product or service continues, they may not be able to meet the demand due to the lack of available labor and stress their organization with excessive overtime, workplace stress, or lose business and clients because they can’t meet customer expectations due to the overall lack of productive employees.

Labor economics are extremely complicated and there are numerous other factors that affect the marketplace but as business owners and managers, our responsibility is to implement the best practices to limit the risk factors imposed on our business. Now, more than ever its time for business owners to take steps to ensure that we focus on the best practices in:

1. Recruitment and Selection
2. Retention and Engagement
3. Compensation Delivery
4. Performance Management
5. Organizational Design
6. Linking HR Initiatives to Business Plans and Financial Measurements

We will discuss these concepts more in future newsletters but if you want to discuss them in more detail now, just let us know and we can set up a time to meet.

Remember the Economic Theory of Opportunity Cost? I just remember it simply as “Time is Money”!  Let’s look for your solution now!