Executives are in a quandary. The economy is growing but the Federal Reserve is determined to reduce inflation to two percent. With US workers in short supply, it is not wise to lay off this precious resource unless your business is in free fall.
Below are six workforce predictions and recommendations to allow for continued economic growth and high returns for 2023.
1 – Don’t believe that the labor market to become abundant.
The US Labor Market is still short 3 million workers from before the pandemic. There are still nearly two job openings for every unemployed American. Less immigration, early retirements, low American birth rates, and exhausted workers are the main cause. These factors are hard to reverse, and the US economy has proven remarkedly resilient. Inflation is beginning to lessen and is currently at 7.1 percent at the end of November, down from 8.3 percent earlier.
Let’s look at the numbers. They will show a growing economy that is beginning to slow with unemployment expected to reach 4.7 percent at the end of the year. Structural factors still leave businesses with a labor shortage.
Job and Wage Gains. According to the US Department of Labor, The US economy added 223,000 jobs in December, the smallest gain in two years. Average hourly earnings grew 4.6 percent from the previous year, still high. The US economy added 4.5 million jobs in 2022 the second -best year of creation after 2021. Most of the 2022 gains were in the first seven months. Hiring is cooling but still moving strong. The unemployment rate fell to 3.5 percent. Still, the US Labor Department reported more than 10.5 million job openings as of the end of November, with 6 million unemployed. Please see the charts below on payrolls by sector, created by The Wall Street Journal.
According to the Wall Street Journal, most economists predict that the unemployment rate will rise to 4.7 percent by the end of the year. Still far from the unemployment of 13 percent at the height of COVID in Q2 2020, an era of mass furloughs and layoffs.
Turnover. The turnover rate is 10.87% across all industries and no longer receding. It is lower than the 47.2 percent average turnover of 2021, higher than it was before the pandemic.
According to Daily Pay turnover is expensive. It is estimated that employee turnover can cost 1.5 to two times each employee’s salary, depending on their seniority, length of tenure, and other factors. The average cost to replace an hourly worker is $1,500. Replacing technical employees can cost 100-150% of their salary, while replacing someone in the C-Suite can cost 213% of their salary.
The tech industry has laid off more than 150k workers. Many of these CEOs, such as Meta’s Mark Zuckerberg, said they over hired during the pandemic and now need to restructure. Yet most of the employees are finding employment quickly and they are not driving higher unemployment.
Long-Term Labor Shortage. The US is in long-term labor shortage that will last the rest of the decade due to the above demographic factors and exhausted workers. The industries most affected are education, healthcare, and the transportation, durable goods manufacturing, leisure, and hospitality industries. Hybrid work has allowed employers of professional services and technology companies to avoid high turnover. See the chart below by the US Chamber of Commerce.
While reducing hiring is wise if your business is receiving fewer orders, I don’t recommend eliminating your recruiting departments in 2023. You may find yourself hiring them back quickly.
2 – Investment in career development and upskilling will grow, especially when implementing artificial intelligence.
It is cheaper to retrain existing workers rather than to hire new ones. America’s labor shortage will continue through the decade. Whether your career development goals are to improve employees’ skills in their current roles, such as data science or nursing, or to train employees to work collaboratively with AI and automation, upskilling is important and provides a handsome ROI.
Using your talent management system and results on KPIs, assess which parts of your organization are struggling with changes to automation or obsolete skills. Then plan which skills are needed and who can be trained and transferred to new jobs.
It is essential to use a people-oriented approach to implementing AI to keep the human emotions front and center in the change. A people-centric approach involves the affected employees and clients in the design of digitizing workflows and processes.
3 – Rising wages will continue but decline slightly.
Three national human resources professional organizations have released their predictions of salary increases for 2023. Their results show that while recruiting and turnover are expected to ease slightly, high salary increases will continue into 2023.
Willis Towers Watson (WTW) reports that employers are planning an average salary increase for exempt employees of 4.1 percent, slightly up from last year’s four percent.
US respondents to Payscale’s survey project an average exempt employee salary increase of 3.8 percent for 2023. Within some industries, base salary increases for 2023 are expected to be even higher, such as 4.7 percent in engineering and science, 4.3 percent in food, beverage, and hospitality, and 4.2 percent in technology and software.
4 – Hybrid work is here to stay.
Make peace with it.
Before Covid and the instant transition to remote work, the US had faced a labor shortage for years. The workforce also suffered from poor engagement, high stress, employee-employer mistrust, crowded unproductive office space, and poor cultural connection. The pandemic uncovered these many issues.
But too few companies are paying attention to them. Remote work is the lightening rod they are focused on. Fixing the underlying issues will require re-examining the work experience and the future of work for the rest of the decade. But too few companies are paying attention to these issues or trying to solve them.
Studies show employees are more productive working remotely or in hybrid environments. Most employees still want to continue to work remotely in hybrid environments. If they are required to be in the office five days a week, one-third say they will leave their employer.
It is time to make peace with hybrid working or risk losing productive employees. As we have seen, turnover is expensive. Hybrid working provides a great ROI and saves an average of $10k per hybrid worker.
By optimizing hybrid work, you can have more productive and motivated employees and spend less on office space. Learn how here.
5 – More companies will invest in improving their company culture
Forget the chatter about quiet quitting and quiet firing. Instead, invest in your culture.
Earlier this year, MIT researchers uncovered that toxic organizational cultures drive employee turnover ten times more than pay. They found that your corporate culture may be the No. 1 cause of costly employee turnover.
The MIT researchers found that much of the media discussion about the Great Resignation has focused on employee dissatisfaction with wages. How frequently and positively employees mentioned compensation, however, ranks 16th among all topics in terms of predicting employee turnover.
A toxic corporate culture is by far the strongest predictor of industry-adjusted attrition and is ten times more important than compensation in predicting turnover.
The MIT researchers found that the leading elements contributing to toxic cultures include the following:
- Failing to promote diversity, equity, and inclusion
- Workers feeling disrespected
- Behaving unethically
- Failing to provide adequate job security
- Frequent reorganizations
- Demanding too-long hours
- Failing to recognize performance
- Responding badly to Covid-19
You can learn more here.
6 – Layoffs outside of high tech will mildly increase.
It is a natural part of industry business cycles to have layoffs. As some markets have less demand and products and services become outdated, companies need to shift gears and restructure. However, how they restructure is as important as the restructuring itself.
Why? Because of its effect on the survivors. Research shows that survivors often have a 20 percent decline in performance after a layoff. In addition, if they are not convinced of the company’s new direction or they don’t believe in management’s ability to achieve their strategies for growth, the result will be voluntary turnover, especially among the best and brightest employees.
To learn more about how to be smart about layoffs, read more.
In 2023, most industries will experience a slowdown. Visionary business leaders will keep their heads and avoid succumbing to the instinct to lay off employees when other belt-tightening measures will do. Moreover, throughout the decade, the US will face a labor shortage. Lead your precious workforces carefully in this slowing economy, and you can ensure high returns in 2023.