Employers could see this coming, and now they say it’s hard to imagine how long it will last.

U.S. labor costs in Q3 2021 increased by the biggest margin since 2001 as companies boosted wages and benefits amid a severe worker shortage, suggesting inflation could remain high for some time.

The Employment Cost Index (ECI), the broadest measure of labor costs, surged 1.3 percent in Q3 2021 after rising 0.7 percent in the quarter before, the Labor Department said in October. It marked the largest gain in 20 years.

Labor costs powered ahead 3.7 percent on a year-over-year basis, the largest rise since the fourth quarter of 2004.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and is seen as a predictor of core inflation because it adjusts for composition and job quality changes. Economists polled by Reuters had forecast the ECI advancing 0.9 percent in the third quarter.

Wages and salaries soared 1.5 percent after increasing 0.9 percent in the second quarter. They were up 4.2 percent year-over-year. Benefits gained 0.9 percent after rising 0.4 percent in the April-June quarter.

Additionally, U.S. employers were expecting their group health plan premiums to increase, on average, around 5 percent in 2022, even after taking cost-management initiatives into account, according to recent employer surveys by several HR consultancies.

As companies are paying more to recruit and retain workers, they are also struggling to find applicants. The COVID-19 pandemic has upended labor market dynamics, creating an economy-wide acute shortage of workers that nearly all industries are facing.

According to a Gallup study in July, 48 percent of employees are actively looking for their next role and 1 in 4 will find a new role in the next six months.

Meanwhile, the most recent unemployment claims report for the week that ended Nov. 20 noted the lowest number of new claims—199,000—recorded in more than 50 years.

Yet while there is a record low number of people claiming unemployment, there also were 10.4 million job openings at the end of September (1.4 for each employee seeking work), and a record-setting 4.4 million people quit their jobs that month, either leaving the workforce or choosing to work elsewhere.

Switching jobs can pay off: A September study by Zippia Research showed that after switching jobs, salary increases 14.8 percent on average and wage growth rises 5.8 percent.

Workers between the ages of 25 and 34 receive the highest wage increase, at 9.8 percent. The bigger the company, the larger the pay raise: Companies with more than 1,000 employees offer an average pay raise of 6.9 percent.

What Companies Are Doing About It

Leaders at companies facing soaring wage and recruitment expenses say the rate of increases is something they’ve never seen before.

Robert Guy, SHRM-SCP, chief people officer at food packaging manufacturer Darnel Inc. in Monroe, N.C., said hiring costs for his company aren’t boosted by inflation; rather, they are more affected by the lack of available workers and turnover.

“We’ve done what many businesses are doing in response: increase base rates and offering hiring incentives. As a result, the hiring costs have increased dramatically. Our benefits haven’t changed during [the pandemic],” he said. “The fact that inflation is feeling like it is here to stay, this will eventually have a longer-term effect on all things related to employment, from onboarding to retirement.”

Philip Dana, vice president of human resources at Dendreon Pharmaceuticals, which is headquartered in Seal Beach, Calif., said his company recently added a managed service program to control mark-up costs for supplied talent.

“We also shifted benefits brokers and intend to assess the shift from fully funded benefits to self-funded as well as adding a high-deductible plan in order to manage the soaring health care costs,” Dana said.

Dendreon’s HR team previously had 11 workers, but, given this situation, it added a dedicated senior compensation analyst to stay on top of Fair Labor Standards Act compliance and compensation data. In the next 12 months, the company plans to add more than 150 new hires to its current 540-person workforce.

The $100,000 Guarantee

Andrea Bunch, vice president of human resources at JK Moving Services & CapRelo in Sterling, Va., said her companies incorporated alternate work schedules and paid for employees to take sabbaticals while retaining full health care benefits at the employer’s expense.

“We negotiated aggressively with our health care provider and used wellness dollars wisely to prepare employees emotionally, mentally and physically for what was clearly on the horizon,” Bunch said. “We knew that health care costs could pack a punch on employees and our group health and wellness programs.

“Our proactive engagement paid off as we’ve enjoyed consecutive years with no increase and no modification to our plan composition. That translates to savings for the employer and the employees alike.”

On salaries, facing the additional burden of a nationwide driver shortage, CapRelo’s actions included providing an unprecedented $100,000 minimum annual salary guarantee for all active and future over-the-road drivers, giving them financial assurance and stability during and after the pandemic. Reports in November by the Bureau of Labor Statistics estimated that the average long-haul truck-driver’s salary is $64,210.

Stacey Berk, founder and managing consultant at Expand HR Consulting in Rockville, Md., said the ECI is a data point that CEOs, CFOs and CHROs are paying closer attention to in this unique time period.

“The increase is having a direct impact on the cost of turnover and the cost of hiring,” Berk said. “It is also putting pressure on executives to greatly enhance employee benefits [and] internal job growth opportunities and pay-for-performance merit increases for employees. There’s a sense of permanency to partial and full work-from-home arrangements, and adjusting those policies appropriately is important.”

She said it will be a challenge to control costs in this unique labor market because “there’s too much unavoidable competition. We have seen organizations pausing long-term HR or other organizationwide projects, shifting expenditures to meet this demand.”

More Money for Job Ads

For recruiting and employee referral programs, Berk said she is seeing spot bonuses designed to encourage both existing employees and new hires to stick around.

“It’s hard to avoid the expanding job advertising budget per job, regardless,” she said. “Social media outlets, once reserved primarily for organization projects or services, are rebranding job ads throughout the recruiting process to enhance applicant pools.

“To attract better talent, employee benefits, especially mental health offerings, corporate discounts designed for work-from-home employees and wellness programs are key, but require an investment to set up and maintain.”

She said to encourage existing staff to stay, in addition to offering enhanced benefits, CHROs are trying to tweak their approach to how internal opportunities are offered with individual department leadership. “This takes the form of job rotations or other initiatives to reduce burnout. And, pay-for-performance merit increases are a philosophy that’s hard to avoid due to the turnover most employers are facing.”

Ken Reichart, vice president of human resources at Anterra Management Corporation in Dallas, said his hiring costs are rising.

“First, due to the shortage of workers and, second, from rising competition for workers,” he said. “We have seen wage rates edge up, and where an inexpensive or even free job post would draw sufficient resumes, now we end up sponsoring posts and even offering sign-on bonuses for some positions depending on geographic area.”

To help better control costs, Reichart said his company is asking its hiring managers to communicate as soon as they feel they have found a good candidate so it can turn off or pause the job posting.

“Overall, the process takes much more management than before,” Reichart said. 

We will continue to provide further guidance regarding developing HR-related news. Should you have any questions, please contact our office at 916.444.6200, info@hrtogo.com, or your HR Consultant directly.

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