What to Watch Out for as Wage Rates Grow

by | Jul 26, 2022

Disruption was the theme of our Axsium WFM Forum in New Orleans this year. Our reasons for picking that theme are probably clear—the last two years have been filled with disruptions of all kinds. But the reality is that new disruptions are going to continue for the next year at least. Surviving the pandemic was hard work for a lot of us. Now we’re faced with new challenges like inflation and wage rate growth.

If dealing with wage rate growth isn’t on your radar already, it really should be. We’re already seeing the impact of it in some markets. And dealing with it may be more difficult than you think.

What’s Driving Wage Rate Growth?

There are two primary reasons why wage rates are starting to increase, and likely will for the foreseeable future:

  • The current employment landscape
  • Minimum wage increases

The Current Employment Landscape

I’m sure you don’t need me to tell you that it’s an employee’s labor market right now. Thanks to the ravages of the pandemic and the Great Resignation, many companies saw team members leave on a massive scale.

Unemployment rates also have a hand in the problem. In the US in June, the unemployment rate was 3.6%—about the same as it was before the pandemic. In the UK the story is much the same, with unemployment sitting at 3.8% in the period from February to April. That’s slightly less than it was in March 2020, when the UK went into its first lockdown.

Sign text closeup for help wanted with red and white colors by entrance to store--employment rates are causing wage rates to grow.

We’re in a situation where there are fewer people looking for work in a lot of industries than there are jobs available. In fact, issues related to this labor shortage have been headlines for months at this point.

When there are fewer job-seekers than jobs, you need to start finding ways to make your jobs more appealing than your competitors’. And that’s when wage rates start to grow. And that is going to be the next headline.

Minimum Wage Increases

There is another important driver behind this wage rate growth. If you’re in the US, I’m sure you’re aware of the minimum wage increases coming over the next year. It will happen at different times in different places, but minimum wages are set to increase across the country and in many places around the world.

But that’s not the limit of the challenge to employers. Yes, your minimum wage will increase. But you need to ask yourself what impact that change will likely have on your non-minimum wage workers. In all likelihood, you’ll begin to feel pressure to increase wages across the board.

This pressure is called wage compression. Here’s a simple way to think about it. Say minimum wage in your state is $9 and now it’s increasing to $10. Of course, anyone making less than $10 is going to need to have their wage increased. But what happens to those who were making $9.50? Will they be happy to go to $10, or will they be expecting their wage to increase to $10.50?  

Why is Dealing with Wage Growth Difficult?

The two drivers I’ve outlined directly impact two types of employees: new hires and workers below the new minimum wage. But as I’ve just explained, wage compression means that wage growth isn’t limited to those two types of employees. In fact, it could affect your entire organization.

There are two obvious solutions to the problem. You could just raise those wages and salaries that need to be raised and ignore any requests to increase any others. Or you could implement an across-the-board increase that brings everyone’s wages and salaries up by a certain percentage.

Personally, I don’t think either of these options are really that good. I’m sure I don’t need to tell you where you’ll run into problems if you opt for the first. And a general percentage increase will inevitably be expensive and may well increase wages where an increase wasn’t expected or needed.

Crossing Geographic Lines

If you are a large employer, you’re likely operating across different geographies and jurisdictions. Minimum wage increases and wage pressure won’t all happen at the same time. This complicates your options for dealing with wage compression.

It’s also important to think about the affect the approach you take to wage compression will have on your bottom line. Over-reacting can have a serious impact on your finances, which is reason enough to avoid a blanket percentage increase.

A Better Way

It’s rare that I advocate something like this, but in the case of wage rate increases, it pays to take a more complicated approach. You need to think surgically. For instance, think about what your wage rate is in one market versus another. You may even want to go so far as thinking about wage rates per role.

And I’m not the only one who’s thinking this way. In fact, some companies already slice and dice their wage rates by market and role. I’m hearing more and more often about companies like Costco deciding to start paying a high starting wage.

The genius thing about it, of course, is making a move like that early doesn’t just make you more attractive to potential employees. It also makes the news, and that’s the kind of public attention you want.

But there’s an added layer that supports my point about complexity. Most of these companies are managing their wages in the market. Let’s take Chicago as an example. The average employee at a high wage-paying company’s inner-city locations may make $23 per hour. Employees at locations in rural Iowa, on the other hand, may be making $18 per hour.

Wage rates for urban workers may be higher than those for rural workers

It’s this level of complexity that can become hard to manage. You need to understand what competitive wage rates look like in every market you serve. You can get this from other companies’ job listings, of course, but your hiring managers will be your best source.

There’s one other important consideration here. You need to manage the data you gather to properly understand how any increases will affect your payroll and, ultimately, your profit. This is where things get really difficult—and historically there hasn’t been an easy solution.

How Planara Can Help You Avoid Problems with Wage Rate Growth

Luckily, Axsium has just launched Planara, our powerful new labor planning and analytics solution designed for complex problems just like this. And while the problems that Planara can help you evaluate are complex, it isn’t complicated to use.

Planara evaluates the labor impact of changes that may vary based on geographic or time-based factors, like increased wage rates. It’s scenario feature gives you an overview of the impact any change in wage rates could have on your labor costs themselves, as well as related metrics like Sales per Labor Hour. And it lets you drill down into the specifics to get more detail.

With Planara, you can model any number of “what if?” scenarios. Examine the impact of bringing all minimum wage employees up to a new wage rate. See the effect an across-the-board percentage raise could have on your bottom line. And break your scenarios down by region, individual location—even role. Planara empowers you to do all that and more.

This powerful modeling tool allows you to see the labor impact of each approach, and experiment with how to cushion the impact. And, importantly, you can compare different scenarios right there in the solution.

If you’re concerned about how wage rate growth will affect your business, contact us today and we can show your how Planara will help your organization build more efficient labor plans. And if you missed our recent webinar where we took a group of industry leaders through a live Planara demo environment, you can watch it here.

Never miss an update!

Sign up for our WFM Newsletter for all the latest trends, insights, and expertise from Axsium.


+1 (416) 849-5400

+1 (416) 849-5400

+61 (0) 3 9674 7312