Labor market woes spell both opportunity and potential disaster for industry.
By Elliot H. Clark
This month we rank the best providers in the industry with our annual RPO Baker’s Dozen Customer Satisfaction Ratings™. If you asked me my opinion about the near future, I would tell you I am both ebullient and apprehensive. The workforce is at one of the lowest participation rate in decades. Talent shortages are all the talk and are very real, and they will get worse. We’ve had a persistent talent shortage for technical, professional, and executive talent for many decades and now we have added hourly and semi-skilled to the list of job categories in direly short supply.
In the wake of COVID-19 and the rapid re-opening of the economy, a witch’s brew of labor market actions has made it harder to get people back to work, including a childcare crisis due to closed schools and a re-evaluation of the dual income family by some parents. And all roads lead to wage inflation. Labor economics moves in decades not quarters. Problems, once they begin, will be with us for years. When supply is short and demand persists, the value of anything in an economy rises. Wages are the same thing. But how does wage inflation impact the labor markets? It does in two ways—and neither is good for employers.
First, the need to hire will lead employers who recognize the reality of market costs rapidly increasing wages for new hires leading to necessary adjustments to existing employees. This crimps profit margins and ironically, often HR program costs are cut. Go figure. In any case, the employers who do not recognize reality will have mounting open jobs, lose competitive edge, and then inevitably cut costs for HR. Go figure. We hope companies have learned from COVID-19 the importance of HR and will not repeat these historical mistakes. In either circumstance, recruiting becomes uber competitive. This is good for the RPO industry as companies turn to service providers who have best in-class infrastructure, technology, and talent. They can quickly respond to the changing realities of the competitive market. I am feeling pretty ebullient, but where is that anxiety coming from?
As wage inflation increases, the rate of turnover skyrockets (mind you going from 5% voluntary turnover to 10% is a 100% increase so, yes, skyrockets). RPO firms placing employees today may have them leave quickly and this upsets clients. Plus in hyper competitive environments, many companies have unreal expectations of the capabilities of outside providers (and occasionally, outside providers exaggerate, but not the better firms). As the period of high competition persists, companies will begin to fail to meet hiring manager demands and decide to bring recruiting in-house and this is bad for RPO firms. As a service provider, they will get blamed for market realities beyond anyone’s control. Organizations and their managers need to recognize their strengths and weaknesses and be realistic about hiring in these kinds of economic circumstances.
The second effect of wage inflation driving turnover is that you cannot offer internal raises that compete with the bid up of wages for new hires. You will always lose that battle, so internal HR needs to really focus on retention, recognition, and engagement programming. The easiest way to keep a position filled is to not let it open in the first place. Recruiting and retention are one thing, not two things and are closely interrelated. If you are losing people and cannot hire new ones, you need to work on your culture, your employment brand, and your management practices. They are all parts of the problem.
As for the RPO industry, as hiring goes, so it goes. Remember these firms can help, but they do not walk on water so as the market heats up, they are a good opportunity to “turn to,” but as the market stays hot, as one of your allies, don’t “turn on” them.