US wages are going up, and those who don’t adapt to the new reality will fail

Labor is in short supply, so it’s more expensive. It’s simple economics and hankering for pre-pandemic times won’t help

Last modified on Sun 10 Oct 2021 07.01 EDT

There is a significant shortage of labor across the United States. Yes, federal unemployment Covid payments ran out after Labor Day. But still, many workers are reluctant to return to work, wary of their health and safety as the Delta variant continues to rage. Many are looking to switch jobs amid reports of the “great resignation” and employers are desperate to do whatever they can to retain workers as demand continues to remain strong.

As a result, job openings are at a historic high and small businesses across the country are begging for workers. So what happens when the demand for a critical commodity is high and the supply of that commodity is in short supply? It’s simple economics: prices go up. Wages are going up.

According to data from the US Bureau of Labor Statistics, the average hourly earnings of all employees in the US working for private companies rose to $30.85 in September, following large increases in the prior five months. It’s a fair bet that wages will increase even more in the very near future if people are going to eat and heat their homes.

Many small business owners across the country – and across industries – get this.

For example, there’s Amanda Cohen, who owns a vegetarian restaurant in New York City and who raised her starting wages to $25 an hour. She says she hasn’t “had a single problem” attracting workers to her business. “We put the focus on ‘staff comes first and everything comes second’,” she told a Business Insider reporter. “I can’t succeed without a staff.” Cohen has raised her prices 30% to cover these costs.

Hourly wages are up at restaurants and retailers elsewhere. And wage increases aren’t just happening in the restaurant and retail sector.

The furniture manufacturer Ethan Allen recently announced an expansion into Vermont along with an increase in its starting wage to $16 an hour as well as wage increases for more experienced associates. A manufacturer of trailers in Wisconsin is raising wages for the second time in a year in response to the labor shortage there. Another manufacturer in Dayton, Ohio, is giving every employee a $10-an-hour raise. The National Association of Manufacturers says that its members plan to increase wages 3.5% over the next year and I’m not sure that’s even enough.

The founder of a construction company in Los Angeles is having a hard time finding workers and admits that “the easiest way, which is the hardest way” to get and keep workers on his job sites is “to pay them more”. A company that builds roads in Tennessee bumped up their starting wages to $14 an hour (this is Tennessee, not San Francisco). A New York construction firm raised hourly raises to $25 and is now paying hiring bonuses. Paper hangers, pile driver operators and roofers have seen their wages increase more than 15% over just the past five years.

Wage increases are affecting small businesses everywhere – from the Hudson, New Hampshire, landscaper that is paying workers $25 an hour to just “see if they want to pursue a position” to the trucking companies in Wisconsin that are offering hiring bonuses between $5,000 to $15,000. Service industry wages overall are up about 10% this year.

This is not temporary. Once you increase an employee’s wage you’re not going to ever take it away from them in the future. Which means there’s an enormous shift in overhead structures at small and large firms happening across the country, a shift that will continue for the foreseeable future.

I have some clients that are still operating as if it’s pre-Covid. When they’re looking for employees they’re offering compensation similar to the rates they paid before. It hasn’t dawned on them that times have changed and the basic principles of economics are playing out in front of them: when demand exceeds supply, prices go up. Those businesses that accept this reality will adapt and continue to profit. They will hire good people and succeed. Those business owners that refuse to understand this simple concept simply won’t.

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