As the unemployment rate slowly stabilizes through 2021 alongside the COVID-19 (coronavirus) vaccine rollout, several major problems will remain in the labor market. Whether your organization relies on temporary, contracted, part-time or full-time labor, disruption in the labor market will continue to drive the cost of hiring upward and negatively impact your organization’s bottom-line. Companies that start reevaluating their hiring practices while keeping labor market issues at the top of mind will be better equipped to tackle disruptions in the labor market.
Temporary labor is expanding
More organizations are adopting contingent workers—those who do not have an explicit contract for ongoing employment—because organizations can realize cost savings by employing temporary workers. Although contingent workers are often leased through temporary staffing agencies that charge markup fees of 25.0% to 100.0%, employers can avoid the high costs associated with employee benefits when employing temporary workers, including health insurance, social security, unemployment contributions, vacations and holidays. However, the growing use of temporary, contracted or gig workers has some downsides. For instance, temporary workers are susceptible to attrition and high turnover due to the lack of long-term benefits offered by the employer, which has the potential to create inefficiencies and knowledge gaps and can also increase an employer’s training costs.
In 2021, demand for temporary labor from healthcare, e-commerce, information technology, food processing and logistics will continue to expand. However, demand for workers in hospitality, catering and other service-related work will be tempered by limited travel, occupancy restrictions and temporary closures. Notably, the pandemic has increased the talent pool of remote workers via online marketplaces, such as Freelancer.com. Procurement departments should prioritize negotiating favorable terms in the temporary labor market over reducing staffing agency fees. For instance, organizations should consider negotiating more rigorous tenure limits for part time workers, emphasize temporary-to-permanent worker conversion in critical roles, update remote on-boarding processes and implement risk mitigation safeguards around intellectual property and sensitive employee data.
Attrition is accelerating
The attrition rate in the labor market represents the share of jobs that were lost to voluntary employee resignations and were not replaced by the employer. Voluntary turnover has plagued organizations as access to new job opportunities via social media has proliferated. Attrition has significant costs for an organization, including the loss of high-skilled workers, increased training costs for remaining workers, loss of staff morale and potentially new recruiting costs. In other words, employee retention is critical in an economic downturn because as organizations freeze hiring efforts, those that retain quality employees are able to mitigate the direct and indirect costs of attrition.
- The average annual attrition rate is the ratio of job “quits” to the average number of employees in the five-year period between January 2016 and January 2021.
- Quits are defined by the BLS as employees who left their job voluntarily. This excludes transfers to other locations, layoffs and discharges.
In addition, baby boomer labor market participants are leaving the labor market at an accelerated pace as many workers have struggled to find work or have opted for early retirement during the pandemic. Among workers aged 40 to 65 who said they lost a job in 2020, 74.0% reported being out of work for more than six months. As a result, skilled baby boomer workers are dropping out of the labor market at an increasing rate. The Bureau of Labor Statistics has also reported that 4 million people have stopped working completely during the pandemic. Although these job losses are not reflected in monthly unemployment data, attrition of the high-skilled baby boomer workforce directly impacts organizations in the form of widening skills gaps, rising educational costs for employees and a vacuum of senior stakeholders.
Labor shortages are occurring in some markets
Companies that employ blue-collar workers are more affected by labor shortages compared to those that mostly employ white-collar workers. Although there are skilled labor shortages in information technology (IT) and in higher education, growing shortages of blue-collar workers is creating significant headaches for hiring managers. There is a mounting shortage of labor in several markets, including construction, unskilled tradesmen, agricultural, nurses, electricians, food and beverage distribution and shipping and transportation. As the Baby Boomer generation continues to retire at an accelerating pace, an estimated 62.0% of maintenance and repair firms in 2021 are currently struggling to replace the vacated skilled trade positions. In another example, an estimated 10,000 electricians are retiring annually while only 7,000 new electricians join the field, according to the Bureau of Labor Statistics (BLS) and the National Electrical Contractors Association (NECA).
Beyond the exit of the baby boomer generation from the labor market, rising educational costs and changing cultural sentiment that negatively perceives blue-collar factory work pose significant hurdles to expanding the availability of trained laborers. In addition, declines in community college enrollment and trade school membership has dampened the labor market outlook through 2024. The widening shortage of workers is expected to exert upward pressure on average wages as employers are pressured to attract new workers. Organizations that rely on skilled tradespeople and low-skilled labor should look to forge community partnerships with local chambers of commerce, universities, trade colleges, high schools and vocational schools to raise awareness of employment and salary-growth opportunities.
Labor market inequality is widening
Lower-wage, older, young, female and minority workers are disproportionately displaced in the labor market in 2021. These demographics tend to hold a greater share of blue collar and service-industry positions, which have been heavily impacted by pandemic-related shutdowns. Amid the dramatic job losses since the start of the pandemic, laborers employed in hospitality, construction, manufacturing, other personal services or self-employed are subject to higher unemployment rates compared to other occupations. For instance, women's labor force participation rate hit a 33-year low in January 2021.
Although the unemployment rate is on track to continue to stabilize through 2021, minority groups are expected to suffer disproportionately higher rates and extended periods of unemployment. Inequality in the labor market creates a host of challenges for the broader economy because long-term unemployment lowers employability, reduces the likelihood a worker can find a job in the future and elevates the probability the worker becomes ill or isolated, exacerbating worker shortages. Many organizations are emphasizing diversity, equity and inclusion at the corporate level in the context of ongoing civil rights discussions. Businesses can implement new equitable standards during initial hiring and throughout all other stages of employee management and development, folding the spirit of diversity and inclusion into the core values of organization. Procurement managers that engage diversity, equity and inclusion practices at the earliest stages of procurement efforts are more likely to reach their diversity and inclusion goals and even financially outperform their less diverse competitors.
- Organizations that develop reward structures, such as using cost reduction discoveries towards employee bonuses, can avoid the high costs associated with labor market attrition.
- Labor unions are on the rise as worker benefits have been reduced alongside the growing share of temporary workers employed in the labor market. For example, union membership rate was up to 10.8% in 2020 from 10.3% the prior year.
- Procurement professionals should seek to shift their contracting approach, with an emphasis on renegotiating temporary labor contracts to lock in favorable terms rather than focus on cutting staffing agency markup rates.
- A shortage of skilled tradespeople and unskilled labor will make it more difficult to find labor, which will drive up average wages as enrollment in community colleges, trade schools and other vocational training programs continues to decline.
- Worsening inequality in the labor market for women, minorities and older generations must be combatted in the form of proactive diversity standards. Organizations that achieve diversity goals, such as diverse hiring and promotion rates, benefit from additional competitive advantages, including high levels of innovation and a better understanding of customer demographics.
By: Riley Mallon