Part II of a compensation primer
Historically, hourly workers have been organizations’ unsung heroes. They were the quiet population who kept the lights on (often literally) while leadership and HR focused on salaried workers who were perceived to be the hot workforce in the war for talent. For the most part and without realizing it, leaders folded frontline employees into the whole, blending these hourly jobs with professional-level knowledge jobs. HR leaders assumed that reward programs and processes that work well for salaried workers would also work for the frontline.
This all changed with the pandemic. Suddenly, the employees who were really needed to show up and get the job done were those exact same workers who had been taking for granted. In 2020, frontline employees earned the label “essential” and often were just that – an assurance for necessary health, safety and goods and services at a time when meeting basic needs was uncertain.
While knowledge workers were sitting in their home offices dealing with one set of concerns, frontline employees were still going into police stations, hospitals, plants and distribution centers, still building the widgets and still delivering life’s necessities. In fact, many frontline workers’ workplaces were suddenly busier than ever, and it was frontline workers who were filling otherwise desolate sidewalks, subways, streets and highways at all hours of day and night.
Looking back, we’ve all learned an important lesson. The employees we once took for granted are still our lifeline. But there was one set of people who didn’t need to learn that lesson: the people who were doing the work. Instead, frontline employees learned that the pandemic, coupled with severe talent shortages, gave them a new level of leverage in the labor market that continues to exist today.
No longer able to afford taking these employees for granted, employers are asking complex questions about how they can attract and retain frontline workers who continue to keep the lights on and the lifeline of goods and services flowing. We have answers, but first it’s important to understand why there just aren’t enough of these employees.
Last year, there were 76.1 million hourly workers representing more than half (55.8%) of all U.S. workers. And hourly pay for these workers is at an all-time high, which begs the question – why can’t we find enough frontline hourly workers to meet our current demand?
Hourly workers are hard to come by for a number of reasons, but demographics have been working against us for some time, and the analysis in Figure 1 explains why. Despite overall population growth from 2010 to 2020 (11.9%) and labor force growth (4.5%), the labor force actually shrank among age groups 16-24 (-3.4%), the historical entry-level talent pool, and 45-54 (-10.6%), the historical talent pool for both highly skilled workers and leaders. The data show the same result when analyzed from 2010 to 2019, indicating that this issue originated before the pandemic.
Source: WTW analysis of U.S. Census and U.S. Bureau of Labor Statistics data.
Then, the pandemic drove down labor-force participation rates (i.e., the proportion of the working-age population that is either working or actively looking for work) as well as immigration for these and other age groups, effectively creating a bigger talent crunch. The resulting low supply of workers gave employees greater choice. It increased their ability to negotiate higher wages and more favorable benefits and work arrangements by changing jobs. Employers were unable to replace employees due to low workforce availability.
Thus, The Great Resignation was born. Labor economists anticipate even lower levels of labor force participation in 2030 for workers under the age of 45. And, because the 2030 labor force for age groups 16-34 is expected to be smaller than in 2020, the problem likely will not self-correct any time in the next decade.
In addition to the laws of supply and demand, a perfect storm of events has resulted in unprecedented increases in U.S. hourly wages.
In 2018, Amazon changed the pay landscape for frontline, hourly workers when it raised its minimum wage to an average rate of $15 per hour for all U.S. employees. At the time (and still today), Amazon was one of the largest U.S. employers of hourly workers, adding more jobs that year than any other American company. In its press statement at the time, Amazon said the pay change would impact more than 250,000 employees plus 100,000 seasonal workers.
Amazon’s workforce grew exponentially with the pandemic when the demand for online goods and fast delivery surged. Since the start of the pandemic, Amazon has hired 550,000 new employees, bringing its U.S. total to more than 950,000 people, trailing only Walmart as the second largest private U.S. employer. In September 2021, Amazon again raised its average minimum hourly U.S. rate to $18 per hour. Most recently, in September 2022, it announced another hike in the average starting pay for U.S. frontline employees to an average of more than $19 per hour. They also introduced a new benefit that allows employees to collect their pay at any point during the month.
With the U.S. federal minimum wage static at $7.25 per hour since 2009, Amazon’s moves in the past four years have proven to be revolutionary. While other retailers such as Walmart, Target and Costco have kept pace with Amazon, mid-size and smaller organizations have struggled to compete, impacting retail as well as many other industries – which leads to the next event.
In January and February of 2020 – prior to the full impact of the pandemic in the U.S. – the unemployment rate was similar to that as of this writing – 3.5%. But it skyrocketed to 14.8% in March 2020 driven by pandemic lockdowns. By the end of 2020, unemployment leveled out to below 7%, and the economic impact of COVID-19 can best be described as The Great Mash-up of the labor market, especially among hourly workers.
While industries on the “losing” side of the pandemic (e.g., airlines, hotels, restaurants) had to lay off workers, businesses on the “gaining” side (e.g., warehouse/fulfillment centers, food manufacturers, grocery store chains) were gobbling those employees up. Further, and as described, labor participation rates went down and are slowly recovering.
The pandemic was like a springboard not only for job changes, but also for career and lifestyle changes. Workers were attracted to jobs, employers or life choices they may never have considered in the past. Due to the higher costs of childcare and eldercare that also are driven by inflation, many working parents have made the decision to care for dependents themselves, which further impacts workforce availability. Others found after being laid off that alternative careers and/or entrepreneurial ventures were both more satisfying and lucrative. As a result, defining competitive labor markets for frontline hourly workers is more challenging.
For example, if you are in manufacturing, you likely not only compete with other manufacturers for talent, but also with fulfillment centers, retailers, hospitals, restaurants and vice versa, not to mention gig-type roles. The reality of this, combined with the Amazon effect, means that any business with hourly jobs now must compete for workers at likely the highest hourly rate in effect in any given location. Industry differences are likely no longer as meaningful.
While industry no longer creates the same level of differentiation among hourly pay practices, location is still a primary driver of pay for frontline hourly jobs. Differences in the prevailing hourly rate vary by location because the supply and demand for labor in different geographies also varies as businesses compete locally for frontline roles. What else varies by geography? The cost of living!
In Part I of this series, we wrote about the difference between cost of labor and cost of living. We also advised that organizations should always ground their compensation philosophies and pay practices in the cost of labor. That is, pay programs and practices should always be based on jobs first and people second.
This concept of leaders determining pay by understanding the market for jobs and then applying that to pay is often one of the hardest concepts for employees to understand – and is reflected when they expect higher pay when goods and services become more expensive. Because pay represents their buying power, which is diminished with high inflation, simply explaining the difference between the cost of living and cost of labor often cannot overcome this expectation, especially in a tight labor market. That leads to the next question.
The war for hourly workers has made several things clear:
In the past two-plus years, it has become clear that many pay, benefit and career programs are structured to attract and retain executive, management and professional roles (as opposed to frontline roles). Such programs do not recognize the unique nature of frontline hourly jobs or what workers value. In conducting an honest assessment of your reward programs and their impact on this population, here are key considerations:
Attracting and retaining frontline hourly workers has never been more challenging. To answer the question in the title, raising hourly rates is not enough for this complex, dynamic labor pool. A multi-pronged total rewards strategy that is customized to this population and considers the work they do, their preferences and their needs will continue to be the difference between employers that are workforce losers and gainers.
