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The US is in a tight labor market.  Unemployment has hovered between 3% and 5% since 2016 (setting aside the two years of Covid) and most economists now agree that it is not expected to rise any time soon.  It’s currently at 3.6% even after the Federal Reserve raised interest rates 11 times (for a total of 6%) in the last 18 months, which should have reduced demand for workers.  It hasn’t. 

According to leading economists, the tight labor market is due to many factors including demographic shifts in which young people start working later and older people stop working sooner as well as more remote work, insufficient or unaffordable child and elder care options, and the rise of side gigs, all of which have reduced the US labor participation rate.  And workforce shortages worsened when the pandemic laid off many employees and they never returned.  Those who did return were less tolerant of workplace dissatisfaction leading to quiet quitting and more side gigs.  The result has been a contraction of the available workforce, especially for traditional jobs.

While low unemployment is generally seen as a good thing, a decreasing labor participation rate isn’t.  The World Bank indicates that the US labor participation rate of working age people (between ages 15 and 65) has declined by 5% from 67.2% in 1997 to 62.2% in 2022.  In fact, the current US labor participation rate is just 3.5% higher now than it was in 1960, a time when the US labor participation rate for women (ages 25-54) in the US was just 38%.  Today, it is 77%.  Even with twice as many women working now – the highest percentage of women in the workforce ever — there are still not enough people working.  This results in a tight labor market which presents challenges for employers. 

And, to be clear, a decline in a nation’s labor participation rate is bad for everyone.  It’s bad for the nation because it slows economic growth.  Fewer people working means the economy produces fewer goods and services.  It also increases the dependency ratio (the number of people not working — such as children, the elderly, the sick and the disabled — divided by the number of people who are working). When the dependency ratio increases, there are fewer workers generating tax revenue to support non-workers, which can put a strain on government finances.  This makes it harder to pay for support and services such as Medicare, education, healthcare, and infrastructure.  Most importantly, fewer workers typically leads to social problems such as a rise in poverty, crime, and social isolation.

It is also bad for employers – all employers — not just businesses.  The recent labor shortage has affected both the private and public sectors.  It’s been felt by local, state and federal government organizations.  Public sector employers across the U.S. have struggled to fill jobs for over 15 years.  But, while businesses were quick to respond to the most recent Covid-related labor shortage with higher wages and incentives to attract employees, government departments have been slower to act.  That is typical because pay raises must go through a legislative process which can take months to complete and take effect.  In the meantime, vacancies mounted for teachers, police officers, firefighters, bus drivers, and corrections officers.  Nationally, the turnover rate in state and local governments increased to twice the average of the previous two decades.  Finally, this year, pay increases materialized.  Many US states, cities, counties and school districts raised wages to try to retain and attract workers despite aggressive competition from the private sector. 

For example, in Georgia, state employee turnover hit a high of 25% in 2022.  Georgia’s Department of Corrections vacancy rate rose to 50%.  In response, they approved a series of pay raises. This year, state employees and teachers got at least a $2,000 raise, with corrections officers getting $4,000 and state troopers $6,000.  Missouri has had the same problem.  About one-quarter of 911 call center positions in St. Louis were vacant in 2021.  Missouri finally gave state workers a 7.5% pay raise in 2022 and then an additional 8,7% raise this year, plus an extra $2 an hour for people working evening and night shifts at prisons, mental health facilities and other institutions. The Missouri prison system advertised openings for guards saying “GREAT PAY & BENEFITS.  No experience necessary.  Anyone 18 and older can apply.  Long hours guaranteed.”  It worked, moving the needle in attracting workers who had been on the sidelines a long time. But now the private sector must compete with the public sector for workers…and that might further raise salaries and fuel inflation.  

In short, where people work, how much they work and for whom they work is shifting.  Hiring and retaining employees is getting harder.  Barring some radical changes, a concerted effort to draw in more workers from the sidelines back into the labor force, allow more working-age immigrants to enter the US, or replace workers with machines, filling job openings in the US will continue to be a challenge for the foreseeable future.  Thus, employee retention will remain key to business growth and success. 

Every Worker Counts and Money Isn’t the Only Solution

If attracting labor is hard, then retaining it is even more important. Retention is critically important to keep from having to advertise, recruit, hire and train employees again and again. A lower labor participation rate can fuel the vicious cycle of recruiting-hiring-training-turnover.   That undermines growth, success and prosperity across the board. 

What can companies do to retain their existing talent and maximize their productivity?  Paying a living wage with adequate benefits is a start.  But research indicates that once employees are paid fairly, the most effective retention efforts revolve around establishing a culture of caring in the workplace.  To that end, there are six major things a business can do to nurture that culture of caring which will directly impact business success.

1. Create policies and strategies that promote retention and reduce turnover.
2. Hire and retain managers who are fair, equitable and kind even as they hold people accountable.
3. Establish strong lines of communication that help employees feel connected and in-the-know.
4. Develop programs that allow employees to learn, grow and achieve goals.
5. Assign work that is meaningful to employees and gives them a sense of purpose.
6. Ensure employee development through cross-training, skill development opportunities, mentoring and coaching.

Policies and Strategies that Promote Retention and Reduce Turnover

According to a report in January 2023 by Robert Half, a business consulting firm, 46% of professionals reported that they planned to look for a new job in the first half of 2023, which was up from 41% six months ago.  But it was even higher for younger workers:  60% for 18 to 25 year olds and 56% for 26 to 41 year olds.  And when they looked at longevity, it was 55% for those who had been at a workplace for 2-4 years and 53% for those at a workplace 5-9 years.  So what can an employer do to reduce the odds?  Start with retention policies and strategies aimed at reducing turnover.  There’s a lot that organizations can implement to reduce employee turnover in the US.

Beyond offering ever-higher wages, employers can create policies that show employees they are valued.  That starts with a workplace that prioritizes and encourages positivity, fairness and respect. 

1. Establish an Employee Handbook that spells out what behaviors the organization expects and accepts.  That manual should include:
2. Policies that discourage / admonish bullying, harassment, and discrimination. 
3. Strategies that eliminate nepotism, favoritism and cronyism. 
4. Policies aimed at achieving parity. 
5. Prioritize Work-life balance initiatives – Some companies offer flexible work arrangements, such as telecommuting or hybrid remote work schedules and flextime.  But for those policies to be effective, the company must support those workers who are opting to work from home some days.  They need to have the same access and opportunities as those who are in the office.
6. Establish a recognition strategy — Give frequent, specific acknowledgment of work done right. Studies have found that companies that recognize employees multiple times a month were 41% more likely to see increased employee retention and 34% more likely to see increased engagement.
7. Create an exceptional onboarding program — Help new employees by educating them on their responsibilities, providing them with the empowerment and resources needed to complete their work and by creating an environment where they feel accepted. Introduce new hires to their teammates.  Pair each new employee with a mentor who can answer questions. 

Putting the right policies, programs and strategies in place helps communicate a culture of caring.  But that is just a basic first step.  Reducing turnover and increasing retention requires employers to not just talk the talk, but also walk the walk.  Next week, we’ll start to explore what a culture of caring looks like for managers.  Stay tuned.

Quote of the Week

“A great place to work is a competitive advantage”
Jack Welch, former CEO of General Electric

© 2023, Keren Peters-Atkinson. All rights reserved.