There is more tension than usual in the business world.  Concerns about the economy abound.  So, what are the biggest challenges US businesses are facing in 2023?  According to various surveys, the major concerns are:

1. Inflation, which is at a 40-year high, is putting a strain on businesses’ bottom lines. As businesses raise prices to cover their costs, customers are experiencing sticker shock and demand is decreasing.
2. Rising interest rates, meant to combat inflation, is making it more expensive for business owners to borrow money.
3. Supply chain disruptions, that arose due to the COVID-19 pandemic, continue to cause delays and shortages in 2023. Some industries are still struggling to get the goods / materials needed.
4. Geopolitical uncertainty is weighing on business confidence.  Worried about the impact of the war in Ukraine on the global economy, business owners are hesitant to make investments.
5. Labor shortages persist, with unemployment at 3.5%.  The labor market is tight.  Businesses are having a hard time finding and keeping qualified workers. Turnover is further pushing up wages and other incentives to attract and retain employees.
6. New technologies are transforming how businesses operate.  Businesses must remain competitive or perish.  Most recently, AI is posing an existential threat to a host of businesses and occupations.

The first four issues are beyond the average business owner / manager’s control.  US CEOs and managers have no control over inflation, interest rates, supply chains or wars raging on the other side of the world. But individual business owners and leaders can implement strategies to address the labor shortage and embrace technology. 

Most companies report that one the biggest challenges they face is an inability to find and keep workers. Shortage of labor has been an issue in the US since before Covid and the pandemic made the problem worse.  The labor market is tight for various reasons that businesses cannot control.  But with the unemployment rate remaining at a historically low level, many companies struggle to find and keep the best talent.  Some solve the problem by raising salaries but that creates other issues.  If people are the most valuable resource of any company, then success depends on attracting and retaining the best and brightest minds.  First, it helps to understand why the labor market is still so tight.

Understanding the Labor Shortage

According to reports by leading authorities on the U.S. business landscape — including the Federal Reserve Bank of New York (February 2023), the McKinsey Global Institute (March 2023), the Brookings Institution (February 2023), the Peterson Institute for International Economics (March 2023), the World Bank (April 2023) and the National Bureau of Economic Research (May 2023) – there is a growing labor shortage facing U.S. businesses now and in the near future.  Simply put, there are just fewer people working.  Why is that?

The US Labor participation rate reached a peak of 67.3% in January 2000, but it has since declined to 62.3% in June 2023.  The Brookings Institution indicates that while labor force participation increased among prime-age women and those over the age of 54, the labor force participation rate among young people and prime-age men decreased even more.  The net result is a labor shortage.  Multiple factors contributed to this.

1. Aging population – The US population is aging. As people age, they retire.  The participation rate ranges from 73.5% to 75.5% for people ages 25-54.  But it drops to 36.4% for those 55+.
2. The rise of the gig economy – The gig economy has made it easier for Millennials and Zellenials to work part-time or work on their own terms, leaving the traditional workforce altogether. 
3. Reevaluation of priorities – The COVID-19 pandemic led to a mass exodus of workers from the workforce, as many people reevaluated their priorities and decided to leave their jobs.  Many opted to retire early.
4. Cost of living – In some cases, the wages offered for open jobs don’t cover the cost of living.  Instead of pushing people to work more, this has actually led many to opt out of working altogether or work only part-time.  This has been especially true for women with young children and college students.
5. Lack of immigration – While he US had traditionally relied on immigration to fill labor shortages in the past, the strong anti-immigration sentiment of the last 15 years made it more difficult for immigrants to come to the US legally.  This reduced the number of available workers, especially for low-wage and semi-skilled jobs, industries and sectors.
6. Skills mismatch – There’s a disconnect between what employers need and what available workers can do, especially in high-growth industries.  As a result, employers have a hard time finding qualified workers to fill open jobs and do not provide that training.

How Will a Declining Labor Force Impact Your Business?

Declining labor participation hurts all businesses in a variety of ways.  When there are fewer workers available, businesses have to compete more for them, which drives up wages. This can make it difficult for businesses to stay profitable, especially in industries with low profit margins.  Higher wages then triggers inflation, another factor pressuring businesses.  Also, when businesses have fewer workers, they often must reduce hours or output, which can lead to lower productivity. This can also make it difficult for businesses to meet customer demand.  And, fewer workers means employees are forced to reduce the number of customers they can serve, which can lead to longer wait times, frustrated customers and lost sales.   Ultimately, not having enough qualified workers or having trouble finding them means business will have trouble meeting customer demands and be unable to scale and grow as needed.

In addition to direct costs, declining labor participation also generates indirect costs to businesses.  Being short-staffed puts increased stress on remaining employees.  Employees work longer hours and take on more responsibilities. While this might seem to drive up productivity, worker overload actually results in decreased productivity, increased absenteeism, and turnover.   And, when a business is unable to meet customer demand or provide good service, it can damage their reputation, making it harder to attract new customers and retain existing customers.  Labor shortages hurt business bottom lines and make it much harder for companies to succeed.

To Succeed, Create a Culture of Caring

Attracting and retaining labor in a tight market is difficult.  But, if attracting labor is hard, then it is imperative for companies to reduce turnover as much as possible and retain talent.  It starts with establishing a culture of caring in the workplace.  There are six major things a business can do to nurture that culture of caring which will directly impact business success.

1. Hire and retain managers who are fair, equitable and kind even as they hold people accountable.
2. Create policies that promote retention and reduce turnover.
3. Establish strong lines of communication that help employees feel connected and in-the-know.
4. Develop programs that allow employees to grow and achieve goals.
5. Assign work that is meaningful to employees and gives them a sense of purpose.
6. Ensure employee development through cross-training, skill development opportunities, mentoring and coaching.

We will look at each of these steps in greater detail over the next six weeks.  Stay tuned. 

Quote of the Week

“Your network is your net worth.” Porter Gale

© 2023, Keren Peters-Atkinson. All rights reserved.