Higher wages, more retirement benefits, better health insurance coverage, free meals while working, and paid time off for full-time workers. All these are being offered to employees of a North Dakota golf course this year. New employees can expect hiring bonuses and training.
“Due to our wages and benefits increasing, we have still had difficulties [hiring] but not nearly to the degree of most businesses locally,” the operator of the course said in an anonymous survey of businesses conducted by the Minneapolis Fed in late July.
Employers across the Ninth District are trying to find the right mix of compensation, benefits, and other incentives to compete for workers. Firms have struggled with a tight labor market since before the pandemic, but the market has gotten much tighter since mid-2021 as job openings grew faster than unemployment. In fact, the survey found that more firms identified labor availability as more of a top concern than any other, even inflation.
“There is no way wages can keep up with the inflation we are experiencing, but we are trying.”
Firms have adopted an average of three compensation and benefits practices to address labor needs, with smaller employers using fewer and larger employers using more, according to the survey. Many of the most common practices reflect what workers have said they want: higher wages, better benefits, more flexible schedules, remote work, and training.
There has been much discussion over the past year regarding practices firms have adopted (or ought to) to compete for workers. But adoption rate of these practices and the kinds of firms that adopt them have been a bit of a mystery because of a dearth of data. The Minneapolis Fed is attempting to address that information gap by asking firms about their compensation and benefit practices for the first time in its general business surveys.
Higher wages are just the start for most firms
The survey offered respondents a choice of 22 practices and asked which ones they had adopted in the last six months. Most of the practices addressed compensation and benefits, including increased wages and other incentives, such as free meals. Some reduced job requirements, effectively expanding the potential labor pool, and two practices substituted in-house labor for automation or outsourcing.
We received a total of 444 responses, representing firms from many industries and levels of employment throughout the Ninth District. The survey did not, however, use random sampling, so results may not fully represent all businesses.
By far the most popular practice was increasing wages (Figure 1), with many respondents saying competition and inflation had compelled them to give raises.
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“Normally, we provide wage increases annually in the 3 to 5 percent range, but during this calendar year we had to implement a second wage increase to help our employees with inflation and compete in our industry,” said a respondent with a Montana firm in the finance, insurance, and real estate sector. “We also had to implement six months of gas and grocery card rewards.”
Some stated they knew they had to offer more but couldn’t afford it.
“There is no way wages can keep up with the inflation we are experiencing, but we are trying,” said a respondent at a Wisconsin firm in the transportation and warehousing sector.
The firm reported that profits were only “somewhat higher” than a year ago and that next quarter’s profits would be unchanged from a year ago.
For most firms, increasing wages was just part of a larger set of incentives. Of the firms that increased wages, 88 percent used at least one more practice and 70 percent used at least two more.
The second and third most common incentives include flexible scheduling and remote work options. The survey broke standard benefits such as health insurance and retirement plans down by several categories. Were they part of a single category, they would be the fourth most common.
Responding to worker demands
These incentives align well with what many workers say they want.
A year ago, when the Minneapolis Fed started surveying workers—primarily those in the service industry—to better understand what they wanted in their jobs, the most common response we received was better pay. Many said they were concerned with paying for basic needs such as housing, food, and other bills. That was when inflation was about 5 percent year over year. It’s now around 8 percent.
Many employers in the business survey said they understood and sympathized with the financial challenges workers were going through.
“Gas prices are the most difficult for my employees. Because we are in a rural area, some drive 20 miles one way to get to work.”
“Gas prices are the most difficult for my employees,” said a respondent from a custodial service provider in Minnesota. “Because we are in a rural area, some drive 20 miles one way to get to work. As a small business owner, it is difficult to see them struggle even after significant pay increases.”
The business had increased wages in the 3 to 5 percent range over the past 12 months, the respondent said.
But with a tight labor market, competition with other employers is also forcing firms to increase wages because that’s what most workers are looking for.
“We have seen some turnover because of how much new entrants into our market are paying,” a respondent at South Dakota community bank reported. “This makes us far less competitive when we are looking for experienced candidates.”
They lamented that their bank’s emphasis on “incredibly generous” retirement plans and health insurance over higher wages is out of step with employees’ “focus on salary above all else.”
Even union contracts have not provided much stability, as a respondent at a Greater Minnesota construction firm found. “We had to give all of our union employees a $5 an hour raise in order to keep them from being poached by other union contractors.”
The worker surveys have also found that workers wanted more than just higher wages. The other most common demands included jobs with better benefits, flexible schedules, and remote work. These appear to reflect concerns workers expressed in the same survey about health care costs; family members requiring care, including children and elderly parents; and exposure to COVID-19.
“We are way more flexible on scheduling than we like to be, but it does improve worker satisfaction and retention,” the owner of a custom apparel firm in North Dakota said in the business survey.
“We are way more flexible on scheduling than we like to be, but it does improve worker satisfaction and retention.”
Another challenge for workers is job requirements that are too stringent for them to meet, such as education, experience, and the lack of a criminal record, according to the worker survey and surveys of employment agency staff members. Some employment experts think loosening requirements would expand the pool of available labor for employers, but employers in the general business survey were less willing to adopt many of those practices. Though 1 in 5 said they had reduced the experience level required, far fewer were willing to do the same for educational requirements, criminal background checks, or drug screenings.
Big firms, big incentives
The cost of providing more incentives creates financial strain for many employers, especially those competing with larger firms, according to survey comments.
One Wisconsin manufacturer said it was “nearly impossible to compete with big businesses that have deep pockets.” The firm has to raise wages to keep up but that means its margins are “significantly down,” the respondent said.
With less resources, smaller firms can end up paying more than they did earlier in the pandemic but for less-qualified workers.
“Many of the younger workers have not had the experience needed, and if they do the larger companies [have] claimed them,” said a respondent from a Twin Cities construction firm.
The survey found that larger firms tend to offer more incentives to employees than smaller firms (Figure 2). Part of the reason they can do this might be that larger firms tend to have stronger profits than smaller firms.
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But even some practices that don’t require deep pockets tend to be used more by larger firms. For example, while 9 percent of firms employing more than 250 had removed or reassessed drug screening, only 3 percent of firms employing one to 10 had done so. This may be because larger firms also perceive greater labor challenges, with more of them reporting higher turnover and difficulty hiring compared to smaller firms (Figure 3).
Labor challenges of Ninth District firms by size
Source: Federal Reserve Bank of Minneapolis
Identifying effective practices
But are these practices working?
The survey didn’t address this question directly, though comparing firms’ responses to questions about practices they used with responses to questions about staffing levels offers some clues.
That comparison shows no obvious relationship between a firm’s ability to expand its labor force and the number of practices it used. It also showed an inverse relationship between turnover and the number of practices used; firms with higher turnover used more practices. That suggests the kinds of practices that firms adopt may matter more than how many.
Among the most common practices, which naturally have the largest sample sizes, those associated with higher staffing levels were hiring bonuses, accelerated hiring processes, and remote work (Figure 4). Better health insurance, retention bonuses, and increased wages were most associated with lower turnover.
Incentives offered by Ninth District firms correlated with labor challenges
Note: These are the 10 most common practices in the survey. Automation and outsourcing are excluded when looking at staffing increases because they're not aimed at increasing staffing levels, but they may reduce workload and help with turnover.
Source: Federal Reserve Bank of Minneapolis
In both cases, increased wages were less effective than bonuses despite the potential for higher earnings in the long run. It’s possible workers preferred bonuses because they didn’t intend to stay with firms very long, or that wage increases were not large enough to be appealing. When firms were asked about wage changes over the past 12 months, bigger wage increases were associated with increases in staffing. For example, 32 percent of those increasing wages by more than 5 percent also reported higher staffing compared to 22 percent of those increasing wages by 1 to 3 percent.
“[We have] little to no applicants. The applicants we do receive do not last,” a respondent from a fuel delivery business in Michigan’s Upper Peninsula said. The firm offered two other incentives as well as decreased job requirements, but its wage increase was in the 1 to 3 percent range.
For many firms, the question is how long they can continue in the competition.
“Living costs increased, staff shortages create demand,” a North Dakota firm in the finance and insurance sector reported, “and that is a recipe to force higher pay regardless of our income increasing or not.”