Tight labor market creating challenges for middle market
Some businesses face production bottlenecks
The U.S. labor market has tightened considerably during the past few months, creating a broader challenge for middle market businesses in filling skilled and unskilled labor positions. This is likely going to be a major problem throughout the remainder of the current business cycle and well into the next.
Chief drivers of the tight labor market are rapidly changing demographics in the United States, the large number of men aged 25 to 54 years old that are on permanent disability and changing preferences among millennials related to work-life balance. Other contributing factors include drug test failures due to the opioid crisis and a sizable but unknown number of individuals who have served time in prison and are not able to participate in the civilian workforce.
RSM’s labor dashboard shows that there are currently only 1.13 individuals per job opening in the economy, a symptom of the growing labor shortage that is already negatively impacting residential real estate construction, manufacturing and agriculture. Meanwhile, the 12-month moving average of job gains is 180,000 per month, more than double the size necessary to meet the demands of new entrants into the labor market, and the primary reason why the unemployment rate has dropped to 4.3 percent. Our forecast for the end of the first quarter of 2018 is for the unemployment rate to drop below 4 percent, which has the potential to cause wages to rise and pressure profit margins.
Businesses are now being forced to manage their labor force carefully to meet demand and ensure productivity. Thus, the pace of firings in the economy has dropped to multidecade lows. Our preferred metric to track this--the 13-week moving average of first-time jobless claims--has fallen to a cyclical low of 242,000, which supports our outlook that middle market businesses will continue to find it difficult to recruit and retain both skilled and unskilled workers.
How are middle market businesses, specifically, responding to an increasingly tight labor market? Based on our third quarter proprietary RSM US Middle Market Business Index survey, which will be published on Sept. 20, 64 percent of middle market executives say they are increasing compensation levels. Of those, another 28 percent are increasing overtime levels to help recruit and retain skilled labor. With respect to unskilled labor, 52 percent of middle market executives are increasing compensation levels, and 32 percent are increasing overtime. Meanwhile, 72 percent said they are having trouble finding skilled labor either “to some extent,” or “to a great extent,” while 42 percent said the same about unskilled labor.
As a result of the labor shortage, 19 percent of respondents with respect to skilled positions, and 17 percent of respondents with respect to unskilled positions, have turned to eliminating some functions completely, which is likely due to rising wage pressures and policy changes associated with the $15 per hour minimum wage movement. In our estimation, this has led many middle market businesses in food and beverage, retail, leisure and hospitality to substitute technology for labor.
Perhaps more problematic, the survey noted that 17 percent have delayed expansion plans due to problems acquiring skilled labor and 13 percent indicated the same due to a lack of unskilled labor. Another 8 percent are scaling back on production levels or targets due to an inability to obtain skilled or unskilled labor.
For the past several months, we warned that bottlenecks in production would likely develop as a result of the lack of supply in the labor market. Our view is this would intensify due to a misalignment of federal immigration policy with the shrinking number of workers who are able and willing to fill entry-level positions, manual labor and agricultural sector jobs. We are rapidly approaching the point where middle market businesses are going to be in the unenviable position of turning down work and growth opportunities. We have seen similar behavior among small banks (those with less than $250 billion in assets under management) due to regulatory oversight linked to Dodd-Frank, and, unfortunately, we anticipate we will soon begin to get similar anecdotal evidence from the broader real economy.