The great resignation: What’s happening out there?

The great resignation, characterized by prolific job vacancies and increased employee separations, has demonstrated the growing leverage employees have to secure higher wages and better working conditions in a quickly recovering economy. Several sectors have had an enormous appetite for labor coming out of the economic stagnation of 2020, and such a demand to attract and retain talent has fueled wage growth across these industries.

The great resignation labor force

A record low labor force participation rate, declining unemployment, and the increased demand for labor have effectively created labor shortage conditions in several sectors, which exacerbates labor competition and drives wage growth. All the while, global trade and supply chains have faced many hurdles due to the continued ramifications of the pandemic – creating economic conditions where demand for material goods has exceeded the available supply, raising prices. Such inflation is now at a 30 year high, straining the real value of wages.

The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. If the price of goods increases at a faster rate than wages, then the true value of wages goes down. At an annual rate of 6.2 percent as of October 2021, the inflation rate is at its largest one-year increase since August 1991. These changes in cost-of-living are slowly reflected in compensation adjustments overtime, albeit often at a slower rate than inflation itself, as workers expect higher wages. As such, rising inflation should generally be seen as a condition for upward wage pressure.

It is essential, front-line, and low wage hourly workers that are particularly vulnerable to the effects of both inflation and pandemic health risks, both of which have likely redefined expectations of what a day’s work is really worth. These workers, comprising large swaths of the work force, came out of the pandemic with exactly the right conditions that allowed them to find or leverage better opportunities: high competition for labor, higher cost of living, and a cultural moment that redefined historically underappreciated service jobs as essential. All culminating into what is now widely understood as the great resignation.

Low wage hourly workers aren’t the only ones reaping the benefits of the current labor market, however. Those in professional and businesses services, typically referred to as white-collar workers, have also enjoyed the boon of job hopping in the current market. While current labor conditions have allowed for low-wage hourly workers to gain advances in salary and benefits, it may be to an even higher degree for specialized or technically skilled workers in white-collar sectors.

Remote work may also play a role in resignations, in industries where it has become widespread since the pandemic. By nature of working remotely, workplace relationships have changed. Not just with co-workers, but also with employers. How might workplace attachments change when you haven’t interacted face to face with a co-worker in well over a year? Remote work has surely claimed its spot in modern white-collar America and is here to stay, but with it comes the added complications of a long-distance relationship with employers. In some instances, this may have helped tilt the scales for people choosing to leave their employer – especially after a year’s worth of pent-up resignations from 2020.

The great resignation and turnover

Evidence of the great resignation is indeed observable in the data from the Bureau of Labor Statistics, but variably so. As the name “the great resignation” would suggest, the Job and Labor Turnover Survey consistently shows high rates of job vacancies and employee separations overall compared to pre-pandemic levels since the spring of 2021. However, evidence of a labor deficit, where employee separations outpace new hires, is only briefly observable in some industries. Transportation and warehouse jobs saw a whopping 34 percent more separations than hires in April 2021. Likewise, education saw 12 percent more separations than hires in the same month, as well as both retail and manufacturing jobs with 5 percent.

Aside from separations, an increase in job openings is certainly spurred by retention woes. However, the impact of economic growth on demand for labor is likely to be an even larger driver of job openings. Because job openings are now opportunities to secure higher wages and better working conditions in such a competitive market, it is arguably these job openings that have spurred turnover. Through this lens, the great resignation has evolved into other pithy alternatives: “The great migration”, “the great renegotiation”, or “the great churn.”

The quits rate is a BLS measurement that tracks voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs – indicating that they can, or believe they can, find better opportunities elsewhere. This fosters competition for labor as workers seek out improvements in pay, benefits, or work culture and flexibility.

Coming out of the COVID-19 pandemic, the quits rate clearly shows the “great resignation” in action – many industries with historically high quit rates are experiencing higher turnover than before the pandemic. Some industries with the highest quits rates include Food Services, Leisure & Hospitality, Retail, and Transportation. Unsurprisingly, these sectors also have the highest quarterly wage growth according to the Payscale Index.

The great resignation and wage growth

Perhaps an even better indicator of retention struggles than anything else, wage growth has been unprecedented in industries and occupations where separations are highest. Given the conditions for upward wage pressure we’ve already discussed, this shouldn’t come as much of a surprise.

The Payscale Index has tracked quarterly compensation trends since 2006 and validates our expectations for high wage growth. The industries with the highest wage growth are those experiencing the brunt of a labor shortage, where competition for labor has been exacerbated by a higher quits rate in combination with lower unemployment and labor force participation. Food service & restaurant jobs saw a yearly wage growth of 5.2 percent in Q3, the highest observed amongst all occupational groups. To close out the top 3, retail jobs saw 4.9 percent annual wage growth and transportation jobs 4.6 percent.

The great resignation has marked the culmination of several unprecedented economic conditions that evolved from the year 2020, while some may see it as the laws of supply and demand made manifest – others might consider it as an aleatory win for the proletariat that has been a long-time coming. There are growing cries that our society should stop thinking of historically low wage hourly workers as temporary workers – businesses need them, society needs them, and families need them. Instead, design them and price them to be livable working jobs, not steppingstones into “a real job.” In fact, research suggests that prioritizing better pay is an investment in business success.

Responding to the great resignation

For compensation professionals, responding to labor market trends amidst the great resignation can often feel reactionary. Compensation specialists rely on accurate market data from as many sources as possible to make intelligent pay decisions to hire and retain talent, but even accurate data can feel volatile in a hot market brimming with opportunity-empowered employees seeking competitive compensation. It’s imperative to temper real-time market data with a holistic compensation strategy that accounts for pay equity and transparency.

Becoming a market hero in compensation doesn’t mean paying the most – it means retaining the best. For some, that might mean a pay premium. For others, work life balance. But at the very least, it means not ignoring market and economic conditions that workers are facing, such as inflation. In 2022, you should be prepared for salary conversations and larger salary increases.

These become less scary when you have access to reliable data that reflects the current market. While some salary bumps may be surprising, especially when accounting for real wage growth amidst inflation, there is much greater risk to the financial health of a business when it is not supported by trustworthy data. Not only are there retention risks in underpaying employees, there’s also financial risk in overpaying. The objective should be strategic efficiency, not reactionary overzealous pay premiums.

In other words, raise pay where and when you need it. This is best achieved through the use of multiple sources of market data. Identifying trouble areas in your turnover is a great first step in uncovering where your pay or work-culture practices need a tune-up within your organization, but it’s benchmarking against market data that ensures intelligent decision-making.

It’s likely true that due to inflation and high competition for labor amidst the great resignation, most job titles are going to see larger than usual pay raises. However, the frequency and degree of those pay increases may be highly variable from occupation to occupation. Playing guessing games and reacting to qualitative assessments of the market is a high-risk approach to the financial and cultural health of your business.

Leaning on quantitative market data to build into your pay strategy not only makes your job easier, it also protects your business. With the right data, compensation practices can rise-up to meet the expectations of a changing workforce and drive both retention and attraction of top tier talent. Learn more on how Payscale solutions can help you make data-driven decisions for retention and recruitment.

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