Does your business need to increase your salaries to attract scarce talent?

It was a bit of a shock this week, the report from the Chamber of Commerce. More than four out of five SME entrepreneurs looking for staff are barely able to find people. Entrepreneurs expect this to lead to less revenue, customers and an overall growth brake for them within three months.

You would expect companies to do everything they can to recruit staff. Nevertheless, not even a quarter of all 517 SMEs surveyed stated that they try to attract talent by offering a higher salary. And this while it repeatedly turns out that salary is the most important motivation for Dutch employees to choose a new job.

Salary will also these days play a more important role for potential new employees than before. Due to, among other things, the consequences of the corona pandemic and the war in Ukraine, inflation in June was no less than 9.9 percent. In other words, money is quickly worth less, and so does a wage that is not inflation-adjusted. Businesses that do nothing about their pay have to contend with worries that make it work. Collective wages rose by no less than 3.8 percent in May.

Are wage increases therefore the solution to labor market shortages? Or is it a cotton swab against bleeding? MT / Sprout dives into the state of affairs behind wage increases.

Who raises wages?

Globally, there is almost one race to the top† First and foremost, the United States. Wages in our country rose by 3.8 percent in May, in the United States they rose by as much as 4.8 percent. Nevertheless, two-thirds of all Americans worry that their wages are lagging behind inflation. That was 8.6 percent in May.

At technology giant Microsoft, staff do not have to worry about it. CEO Satya Nadella wrote in an email to employees in May that he will almost double the salary budget. The company will also allocate at least 25 percent more capital for share packages to employees. In this way, Microsoft hopes to remain competitive for current and new employees in times of fierce inflation.

Not that they have suddenly become philanthropic at Microsoft. The company is engaged in a fierce battle for talent with almost every major technology company in the United States. Google has recently started working on a new employee rating system, which will lead to higher salaries. Apple, a company with many retail employees, is increasing its starting salary this month to $ 22 per hour, an increase of as much as 10 percent since last year and even 45 percent from 2018.

Amazon even doubled the maximum salary for office workers from $ 160,000 to $ 350,000 in February. In a leaked note, the company mentioned labor shortages as the reason for the increase: “The labor market has been extremely competitive over the past year, and by doing a thorough analysis of various options, weighing the economy behind our company and the need to remain competitive to attract and retaining top talent, we have decided to implement significantly larger increases in our compensation than we would do in a typical year. ”

In Singapore, countless companies are involved in a pay rise competition. KPMG is investing 25 million Singapore dollars in salary increases, investor DBS has increased salaries and many law firms have raised their salaries. CNBC even spoke to a lawyer who saw his annual salary increase by 40 percent.

In the City of London, companies trump each other with wage increases. Consultant PwC increases the salaries of senior executives by 9 to 10 percent, and EY and KPMG also implement salary increases. Financing firm Barclays is offering staff a £ 1,200 increase to offset inflation. New Zealand auction site Trade Me raised its employees’ salaries by $ 3,500 in response to “the extraordinary effects of inflation and rising cost of living,” the company said.

Does higher pay always give more talent?

There are currently 112,500 more unemployed than there are unemployed, a situation without precedent. This means that employees in many industries currently have to fix it. They will logically be more picky and less likely to choose an employer who has not adjusted his wages for rising inflation. As UvA economics professor Pierre Koning recently put it to NU.nl: ‘Everything is getting more and more expensive, and people want money left over at the end of the month.’

However, raising wages is not a universal means for employers to fill all vacancies in one fell swoop. An Australian cleaning company raised the salary of interior care workers from $ 25 to $ 45 an hour, a monthly salary of $ 4,400. Lots of money for cleaning work, but the company is still barely able to fill vacancies.

If you want to attract people, you need to do more than just raise wages. The British newspaper The Mirror last month surveyed 2,000 British workers and found that half of them are frustrated at work. They are annoyed at the lack of career advancement. For every fifth, there would even be zero training opportunities to grow. More than half of the respondents now look for ‘new opportunities’ with other employers. In other words: offer employees training and growth opportunities.

Dagblad NRC spoke to about twenty employers in the Netherlands and came to similar conclusions. Salary may be the trump card to attract talent, but a good salary alone is not enough. Secondary benefits are also important, especially in sectors where wages are already high, such as the technology sector.

For example, employees of the tech company Mollie can declare their membership of the gym, as well as their visit to the psychologist, the nail salon or the hairdresser. They can work from home whenever they want and have lunch in the office, reports NRC.

At IT consultant Bizzomate, staff are allowed to spend a tenth of their time on personal growth and four hours a week on volunteer work. Offering more freedoms may well be a good thing, for employees have also sniffed for more autonomy during the corona period. Millennials in particular would value freedom when choosing an employer.

Are there also risks associated with wage increases?

Wages are rising not only at the top but also at the bottom of the labor market. Next year, the minimum wage in the Netherlands will rise by 2.5 per cent, the first increase since 1969. The combination of inflation and wage increases is always accompanied by critics pointing to the risks of a so-called wage-price spiral. Both DNB chairman Klaas Knot and the employers’ association AWVN warned about this.

In a wage-price spiral, employers are increasing their wages, for example because unions are fighting for it or because they want to remain competitive on talent. To offset the cost of these wage increases, companies are raising the prices of their products.

This in turn leads to further wage increases to compensate employees for the more expensive products. Then the vicious circle of wage and price increases would have started, which would lead to inflation. In the 1970s, this phenomenon caused economic stagnation, after which employers and entrepreneurs in 1982 agreed to moderate wages.

Inflation – according to the European calculation method – is now soaring at 9.9 per cent in June, although it is falling slightly. In May, inflation was 10.2 per cent, in April 11.2 per cent and in March even 11.9 per cent. For comparison: in the record year 1974, the annual inflation – according to the Dutch calculation method – was 10.89 percent. Admittedly, it is not entirely fair to compare monthly readings with annual averages, but it does provide arguments for advocates of wage restraint. After all, if inflation is already so high, then do employers not play with fire when raising their wages?

It is not going to run that fast, according to several reputable bodies and economists. For example, in a December report, Rabobank points out that the risk of a wage-price spiral only arises if employees gain more ‘bargaining power’. This is not the case for the time being, as the number of union members has been declining for years. In 2021, there were even 98,000 fewer members than in 2019, the Central Bureau of Statistics reported.

The Central Planning Bureau (CPB) also sees no dangers in raising wages, provided that a wage increase is one-time. According to the agency, the business community has made enough profit to be able to bear the increases. CPB points out that companies should not pass on wage increases in their prices.

Finally, economist Mathijs Bouman in Financieele Dagblad points out that inflation has been driven mainly by rising oil and gas prices. These will account for three quarters of the inflation figure, but according to Bouman, the effect on inflation will have abated within a year. According to the economist, wages and prices may well push each other up, ‘provided that companies and unions keep a little track of the passing on of wages and prices’.

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