The New Reality of Competitive Wages
We’re getting further into the hiring cycle leading up to Summer 2022, and hiring conditions continue to be the toughest we’ve seen in decades. Job vacancies continue to outnumber job seekers by roughly 1.5 to 1, employees are continuing to leave their current jobs at record-high rates, and job seekers are doing more browsing and less applying.
The number one factor determining whether a job seeker will consider a position? You guessed it: wages. (For job seekers using CoolWorks, the top two determining factors of near-equal importance are wages and the availability/cost of housing). That’s the main reason we’ve been encouraging employers to advertise their wages: we’ve heard directly from job seekers that they won’t even consider applying if wages aren’t listed in an employers advertising materials. This sentiment isn’t necessarily reflective of all job seekers, but it does illuminate how imperative it is for candidates today to know what they’re going to earn very early in the decision making process.
However, we still see a lot of posts advertising “Competitive Wages, DOE.” This is standard language for job listings, and a quick way for employers to indicate that they feel their compensation is on par with similar jobs when compared to other employers. But the new reality is that wages aren’t just competing with what other employers are offering – they’re competing with the cost of living.
The biggest slice of that cost of living equation is housing. If you are an employer that provides housing, you’re at a notable advantage because you’re offering candidates easy access to a place to stay for the season, removing a huge barrier to them relocating and spending a season with your company, and broadening your potential candidate pool substantially.
If you don’t provide housing, advertising “Competitive Wages” is going to invite particular scrutiny in a labor market like this, so it’s important to have good sense of what a new member of your team will need to make in order to house themselves while they work for you. In order to cover regular expenses (utilities, food, gas, healthcare, etc.) and set something aside for an emergency fund, savings, and taxes, the rule-of-thumb recommendation is that a housing budget should be limited to no more than 30-40% of gross income. Using 35% as an average, employees would need to gross about $2,850/mo (or roughly $16.50/hr) for every $1,000 they’ll have to spend on rent. Younger candidates may be willing to stretch those calculations a little bit and spend 50% of their gross earning on wages, which would require $2,000/mo (or about $11.50/hr) for every $1,000 of rent, but those candidates may not have much experience and could be limited to entry-level positions.
These figures provide a general sense of what candidates will ultimately have to weigh before they decide whether to apply for a position – or not. If your wages are currently set at levels that would exclude candidates from being able to afford housing in your area, you may be facing the prospect of needing to increase wages. If you’ve been hesitant to do this because it would require increasing your prices, there are a few approaches you could consider depending on the price elasticity of the service you provide.
Price elasticity is a microeconomic metric that measures how much demand for a good or service changes as a result of price changes. Demand for goods that have readily available substitutes is considered elastic (e.g. if the price of apples goes way up, demand will drop as consumers will purchase pears, bananas, oranges, etc. instead). For goods lacking an alternative (gasoline, tobacco, non-generic prescription medication), demand is relatively inelastic – as prices change, demand stays fairly constant.
If the good or service your company provides is not easily replicated (e.g. multi-day rafting trips through the Grand Canyon, guided Denali expeditions, etc), incremental price increases to support higher wages are unlikely to dampen demand, and are less risky to implement. If your service faces more immediate competition (e.g. a hotel in a densely populated area where capacity generally exceeds demand), price and wage increases are a riskier proposition. But the cost of living realities for employees remains the same. If demand for your service is elastic, you’re pricing/wage adjustments may also benefit from an elastic component. Here are some approaches that businesses with elastic demand are implementing:
- Hospitality / Living Wage service charges – The implementation of fixed-rate service charges has become a popular tool for hospitality businesses to provide a living wage for their staff. Some companies have removed tipping and added a fixed 20% service charge, others have kept tipping and added a smaller (e.g. 3%) back-of-the-house service charges to provide higher wages for their untipped positions.
- Bonuses / profit-sharing – Paying regularly occurring (monthly / quarterly) bonuses or profit-sharing distributions allows business to offer their staff higher compensation based on business levels, and helps companies retain staff by providing an extra incentive and share of the company’s success.
- Delivery/Take-out Surcharges – Early in the pandemic, delivery/takeout options were a lifeline for many food service businesses, but it’s popularity and convenience has not abated. Now as in-person dining returns to pre-pandemic levels, the continued demand for to-go options provides a valuable revenue stream for businesses, but places extreme strain on their kitchen staff as well as the front of house personnel who have to process those orders and tend to in-house guests. Adding flat to-go surcharges ($2-3/order) has helped companies retain staffing and capacity levels to serve both customer groups.
2022 is widely forecast to see a large increase in hospitality and tourism spending by consumers. Companies have two sets of risks to balance. On the demand side, the risk is that these forecasts are challenged by some external factor (another pandemic wave, geopolitical tensions, etc.) and tourism stagnates or declines. The supply side risks are more complicated and difficult to adapt to in real-time. The downside risk is that businesses over-staff and increase capacity, and demand doesn’t meet the increased supply. The upside risk is that the forecasts are accurate, tourism increases, and companies do not have the staffing and capacity to meet and fully realize the benefits of that increased demand. Regardless of the outcome, in order to attract and retain staff, companies will have to ensure that their wages are truly competitive with the real costs facing their employees.