Wages and Salaries as the Economy Recovers – Or Not

Tuesday, June 15, 2010

As the economy begins to show signs of recovery you would expect to see a growth in wages and salaries, or maybe not.

In a May 19th article titled “Starting salaries drop with higher unemployment” published in the St. Joseph News-Press by Ryan Davis, it was reported that this year’s crop of new college graduate may need to adjust their salary expectations before heading out into today’s job market.

In a related story by Ruth Mantell, of MarketWatch, in the Business and Financial News titled “Low-ball salary offers can complicate job hunt”, Mantell reports that some hiring managers are offering starting salaries below what the job applicant earned at their former job.

So what is the issue? Labor is a commodity and like any commodity its value raises and falls as the demand and supply fluctuates, or at least that is what I recall from Dr Green Span’s Econ 101 class. Yes two years ago that job seeker might have been earning $100k, but today I just interviewed 6 just like him that were every bit as qualified as he is and two are willing to join my organization at $85k. Why should I pay last year’s prices for this year’s apples? I can hire the other two at “market rates”, get the benefit of their skills and if they both walk in two years, I am still ahead of the game. With their advanced skill sets I can make my numbers and may be still have some room for a small bonus for them. What is wrong with that thinking?

There may not be anything wrong with obtaining the best-qualified candidate at the going market rate. After all, almost every day there is still news of a lay-off here, a plant closing there, and continuing pay cuts and freezes. True, there is a good chance that a “low balled” hire will exit your organization in 12, 24 or 36 months, or as soon as the economy really heats up. But what have you lost, a few months pay, a few benefit dollars or maybe something more.

So what’s the value of the client list that the employee took with him when he got that better offer after being with your organization for just 9 months? How about the knowledge of your IT network infrastructure, what’s that worth? Or maybe the knowledge of your manufacturing process that took a decade for you to develop and refine, what is that work? Yes, you made your numbers last year, but with your top sales guy walking out the door today, how are you going make your numbers this year? How are you going to explain to your CEO that you cannot close the Iowa City deal because the closer just went to work for your competitor?

Yes, we have to live in the reality of today’s economy, which means that we may have an opportunity to hire some very strong talent at some very low prices. Nevertheless, if we fail to take the long-term approach we may find ourselves regretting “low balling” that same talent.