Labor Market: What to Expect in 2011

As more people begin to talk about recovery, more emphasis is being placed on the status of the labor market and how to prepare for the remainder of the year.  A significant number of employees have been frozen at 2008 or 2009 pay levels while demand for recognition and buying power relief has been growing.  I worked with a group of employees several weeks ago that basically summarized the position of those employees caught in squeeze between more demands and little or no additional resources in any organization or industry. The group like many organizations had been through several rounds of layoffs, no increases for several cycles, and an erosion of buying power.  The average employee felt that the current situation was now overwhelming.  One of the leaders likened the current mindset to the light at the end of the tunnel analogy:  the employees want to see the light at the end of the tunnel.  Some cannot see any light at this point. Without envisioning a place where the darkness will end, it is really hard to go on and commit the energy necessary to be successful.  Among those that see some light, it is very small and deep in the darkness.  This group might have more hope, but the fatigue of the recession prevents them from finding solace in the tiny speck of light.

What most of us encounter in our organizations is a degree of organizational fatigue, employee anxiety, and situational fatalism.  These three “factors of doom” come from the combination of numerous years of struggling to take on more work with fewer resources and being tired from our efforts, the continuous stress that accompanies uncertainty and the lack of a clearly defined path out of the current situation, and that most employees have not seen dramatic improvement in their organization yet and worry that the positive change may take longer than anticipated or never come at all.

With this in mind, what are some of the major compensation conclusions we can draw about 2011:

• Expect a Modest Economic Recovery in 2011
• Anticipate that Employers will Reward Employees
• Prepare for the next Labor Market Cycle

Expect a Modest Economic Recovery in 2011

Most major economic indicators predict a modest recovery in 2011 and a “wait and see” mentality for the following years.  Most economists agree that production and employment will remain below the economy’s capability until around 2015.  In addition, the impact of the current US deficit and all of its secondary effects are still unknown. The Congress Budget Office (CBO) estimates that unemployment will be around 7.7 percent in 2011 and the Consumer Price Index will increase approximately 1.2 percent (www.CBO.gov).   Between 2011 and 2015, employment will grow, but at modest rate that gradually reduces unemployment. CBO estimates that it will be 2016 before unemployment will return to approximately 5.3 percent or close to the natural market level of unemployment.

Anticipate that Employers will Reward Employees

A central concern related to the current labor market is the misalignment of available jobs and the skills and capabilities of the unemployed.  In other words, the economy is producing jobs again (approximately 2.5 million per year), but the candidates available in the market place do not have the skills necessary to fill the open positions.  A recent survey by HCS asked 400 U.S. recruiters about their biggest challenges for 2011.  Not surprisingly, the skills shortage present in the market place was the greatest concern at more than double the next closest issue (lack of employer resources).  Necessary tools and candidate interest remain very low and based on current technological advances and high unemployment, these should remain minor issues into the near future. The key concerns appear in Figure 1.

Figure 1: 2011 Recruiter Concerns

The preponderance of a skill shortage necessitates a market response to hold onto current employees and to be competitive at attracting new recruits from the high value resources available in the market place.  An example of how employers are responding to this need appears in Mercer’s 2010/2011 U.S. Compensation Planning Survey. According to Mercer, more than 98 percent of U.S. companies plan to award base pay increases in 2011. Their survey estimates an average increase of 2.8 percent with just two percent of companies planning across-the-board salary freezes in 2011, compared with 13 percent in 2010 and 31 percent in 2009.

Prepare for the next Labor Market Cycle

In addition to giving modest pay increases to reward the commitment made by employees during the economic downturn, many organizations are looking at how get ahead during these turbulent times.  The economic realignment in the U.S. and abroad continues to redefine industries, alter the type and combination of required skills, and create greater competition for resource availability.  It is important for employers to prepare for these changes in the labor market now.

Another important element of 2011 is that each of the aforementioned factors will create sub-markets or market segments with greater competition than the market as a whole.  The demand for new skills shortage of certain skills, more internationalization of the labor market, and more resources being allocated to labor will create pockets of competition. Although the overall labor market may move slowly at between two and three percent in 2011, clearly some  industries and job families will experience much greater competition.  We will discuss these in more detail in the next post.