Those two words are decorating businesses nationwide as America’s recovery from the pandemic intensifies and the businesses that were most hard-hit by COVID-19 closures, capacity limits and other restrictions ready to fully re-open after so many months in limbo. The only problem is that many of them can’t find workers to staff their operations. And while the reasons vary for this labor shortage, it’s forcing companies to get creative with how they hire. Some are offering higher hourly wages to entice more to apply. Others are offering attractive incentives, fringe benefits and upfront bonuses.
You could say that it’s a “worker’s market” right now, as worker pay is increasing at the fastest rate in about 25 years — and the profits of the companies that they’re working for could eventually be what ultimately suffers.
Why the Wage Rise?
As we alluded to in the opening, businesses are having a difficult time staffing their operations. Much of this is likely because out-of-work Americans are still privy to the enhanced unemployment benefits that continue through September 2021, though many states are now beginning to drop the additional $300 per week in aid or add stipulations to who is eligible to receive this money. Even so, there’s a labor shortage that’s hurting businesses and could hamper the country’s overall reopening.
It’s part of the reason why companies like McDonald’s have raised hourly wages by 10 percent. Chipotle and Under Armour are raising its respective minimum wages from $10 per hour to $15 per hour. And even Bank of America has plans to raise its workers’ pay from $20 to $25 per hour by the year 2025. It’s all contributing to a 3 percent wage growth for private workers, the strongest growth since the mid-90s. And it’s likely to continue as more businesses face staffing challenges.
Will it Hurt Profits?
While raising worker pay will have an effect on company profits and profit margins, this isn’t expected to be significant — at least in the near term. This is largely because the economy is expanding at a rapid pace and companies have pricing power, so they can essentially pass on any additional expense to their customer base. However, if the wage increase continues and extends beyond a simple one-time adjustment, it could present a problem.
Unlike material costs, which ebb and flow with time, wage increases are indefinite. It’s unlikely to present a significant problem within the next year or two, but companies could truly begin to feel the pinch down the line in 2024 and beyond — and raising prices to offset higher worker wages might not always be the best answer.
Corporate profits fell by about 6 percent last year, while personal income increased by about the same amount thanks to the likes of stimulus payments. Things could be on a similar trajectory moving forward, which is good news for workers, but potentially bad news for corporations.