United States

Managing labor shortages in the middle market

INSIGHT ARTICLE  | 

Middle market companies across industries are having difficulty filling open positions, particularly those requiring skilled labor. According to the third quarter RSM US Middle Market Leadership Council survey, 72 percent of companies are struggling (to some or a great extent) to find skilled labor, while 42 percent are experiencing the same level of difficulty with unskilled labor.

The unemployment rate in the United States is currently 4.1 percent, in line with what the Federal Reserve considers full employment. Meanwhile, in the past year, a high percentage of middle market businesses made permanent job offers for roles requiring skilled labor (86 percent); companies offered roles requiring unskilled labor to a somewhat lessor degree (71 percent), according to the report.

About half of middle market companies report all or nearly all jobs were accepted for skilled positions—and some 61 percent were accepted for unskilled roles.

But just because an offer is made does not mean that it will be accepted, especially in a competitive labor market. For skilled labor, the salary offered is by far the No. 1 reason cited for an offer not being accepted, followed to a lesser extent by receiving a better job offer; the same holds true for unskilled labor. Companies find they need to take a range of actions to address the challenges of attracting and retaining employees, not all of them directly related to the employees themselves or the positions being offered (see Figure 1). These actions, however, can have significant consequences.

Constrained by the labor shortage

While a labor shortage may be good for employees negotiating compensation and or choosing between offers, it also can curb economic growth. The Federal Reserve noted that labor shortages and the increased labor costs associated with attracting workers were restraining growth in a number of its districts, notably in manufacturing, construction and transportation.1

Adding to the stress of identifying qualified workers is the trend in the United States showing participation in the labor force by those in prime working years steadily dropping, particularly since the Great Recession, to 62.7 percent, a level that is nearly the lowest in the industrialized world. 2

Figure 1: Actions taken to combat the challenge of attracting labor


While market conditions overall point to a healthy labor market, a study by the Federal Reserve Bank of St. Louis notes that vacancy durations have surpassed pre-recession levels, and employers have needed to intensify their recruiting efforts to fill the vacancies. 3

Exacerbating the issue, the quit rate—the rate at which employees voluntarily leave an employer—has recovered to pre-recession levels. Employees are becoming more comfortable with leaving their jobs for other opportunities, a sign that they are increasingly confident in being able to demand higher wages when switching jobs. Meanwhile, the number of unemployed people per job opening has also steadily declined, with currently only 1.13 people available, down from the Great Recession high of nearly seven people available and the lowest level since the late 1990s.

How the middle market is coping

As a result, some companies are forced to delay expansion, while others are taking the difficult step of moving to a different location, presumably going where labor is more readily available or state and local policies regarding employment are more favorable. Current workforce staffing may need to be reduced if the company scales back production or shuts down locations in an effort to accommodate the cost (or absence) of new hires.

Incentives that address the work environment, career development and compensation are attractive, and are offered by a plurality of middle market companies.

But the urgent need to place employees in these jobs, coupled with an ongoing shortage of applicants with strong technical skills, is causing companies to reassess how to optimize their returns on workforce-related investments and to eliminate or at least reduce the workforce shortages they face:

  • Training: Cross-training is key for many organizations, and is perceived to not only help them stay ahead of potential skills gaps but also enhance overall employee satisfaction. The Federal Reserve reports that companies in many districts are turning to internal training and development skills programs to address labor shortages and rising turnover. 4
    Some ask what happens if a company invests a great deal of money training someone who turns around and leaves. Others argue that the bigger danger is not training employees who wind up staying for their entire careers.
  • Engaging: A national Gallup poll found that just under one-third of U.S. employees were engaged in (meaning “involved in, enthusiastic about and committed to”) their workplace. 5
    To combat this lack of enthusiasm and retain workforce talent, companies have begun to offer more flexible schedules, increase interaction with leaders and mentors, provide highly collaborative environments and use gamification―the application of game-playing processes to business efforts―to keep young workers engrossed.
  • Leveraging: Until recently, high costs put the outsourcing of core business services out of reach for many middle market companies. However, prices have come down considerably, and combined with the increasing complexity of running a business, outsourcing has become an essential tool for small- to medium-size businesses. Consultants are often used, particular for technical roles or at companies that do not have the budget for a full-time position.
  • Adapting: Some companies are able to see the labor shortage as an opportunity to be embraced, offering their clients skilled services to support their products and thereby increase company value to the client.

Addressing the big picture

Companies do what they can to cope, but it will take a concerted effort by industry and government entities to address the broader issues that are often said to be contributing to labor shortages. Improving access to education and child care, expanding some work-related tax credits and addressing the economy-crippling opioid-addiction crisis are among the steps that some are suggesting that the government should take to help expand the workforce. 6

In the meantime, the difficulties of recruiting in a tight labor market can leave jobs open for longer periods. As unemployment is reduced, the search for qualified workforce personnel becomes more difficult, threatening to tighten the grip of economic stagnation.

 

1. The Federal Reserve, April 19, 2017 National Summary

2. E. Porter, “Unemployment Is So 2009: Labor Shortage Gives Workers an Edge” (Sept. 19, 2017)

3. The New York Times.“A review of labor market conditions” (July 6, 2017) Federal Reserve Bank of St. Louis.

4. The Federal Reserve, May 31, 2017 National Summary

5. A. Adkins, “Majority of U.S. Employees Not Engaged Despite Gains in 2014” (Jan. 28, 2015) Gallup.

6. E. Porter, “Labor Shortage”