Slowed Wage Growth Doesn't Change Fundamentals for Retaining Talent

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Wage growth was unchanged for full-time workers in Q3 2016, according to the most recent ADP Research Institute® Workforce Vitality Report.

Wage growth was unchanged for full-time workers in Q3 2016, according to the most recent ADP Research Institute® Workforce Vitality Report. That has implications for the Human Capital Management (HCM) industry, but what does this mean for managers interested in retaining talent? Because wages tend to be sticky, it remains to be seen whether this third quarter trend will remain the same, or if it is a true inflection point in wage growth.

Aggregate Numbers Don't Tell the Whole Story

When viewed in the aggregate, the Workforce Vitality Report shows wage growth for full-time workers was the same in Q3 as it was in Q2, at 4.3 percent, and job switchers saw a slight decrease from 3.7 percent in Q2 to 3.6 percent in Q3. As aggregate measures rarely tell the whole story and a particular worker's situation likely depends on a set of other factors, looking at the sub-cuts of wage growth changes suggests a more complicated situation.

For job holders, change in wage growth was relatively constant across all regions, with only the Northeast showing a slight uptick of 0.1 percent in Q3. For job switchers, wage growth decreased in the Northeast and South, dropping 0.1 percent and 0.5 percent, respectively, but increased in the Midwest by 0.3 percent and 0.2 percent in the West.

The fact that job holders saw relatively static growth while wages increased for job switchers across the rest of the country suggests that the dynamics driving changes in job switchers' wage growth could be the result of changes in the fortunes of region-specific industries.

Different Factors Drive Wage Growth for Job Switchers and Job Holders

Wage increases for job holders tend to occur primarily through promotions, performance-based raises or bonuses, whereas job switchers leverage their existing positons to trade up when moving to new jobs. Retaining talent is difficult when workers can seek better compensation elsewhere, and that has increasingly been the case as the economy recovers. Job hoppers whose switch is driven by a job loss try to find employment as soon as possible, and therefore have less leverage when negotiating for pay in a new position.

The U.S. oil industry illustrates this point. A Pew Research analysis of Bureau of Labor Statistics data suggests that energy industry workers have enjoyed the largest increase in wages since 2000 due in large part to a booming oil industry. Their effects were wide reaching, with increased wages producing higher demand for labor and a greater cost of living which creates a halo effect for areas surrounding booming industries. According to Yahoo Finance, this has led some discount retailers to pay a starting wage more than twice the federal minimum wage.

But all booms bust, and the effects of the trend in the energy industry has begun to swing the other way, per Reuters. As oil and gas companies face plummeting oil prices, labor demand has de­clined and wages have dropped for oil workers and the service industry workers who serve them. For areas reliant on one particular industry, there are few options for other employment.

Talent Retention and Declining Wage Growth

Although difficult for some industries, the data does not suggest human resource leaders diverge from their current path. Job switchers will likely continue to see the highest wage growth as they leverage current positions for better pay elsewhere. The most qualified candidates will continue to be sought after in the labor market, and keeping your employees is a matter of giving them incentive to stay, whether creating a workplace where employees feel valued or improving wages to stay competitive.

For more insights on wage growth trends, download the ADP Research Institute® report: Workforce Vitality Index.