All signs point to rising labor costs for business in both the short and long term. External forces, like the $15 minimum wage in Seattle and an unemployment rate near 4 percent in the Puget Sound region, mean that workers will begin to demand and receive higher wages.
Small businesses need to start planning now for how to adapt to this tightening labor market by updating their business plans.
There are three strategies to consider in adapting to a tightening labor market.
Increase prices: The simplest way to accommodate a rise in labor costs is to pass it on to your customers. For businesses in less price-sensitive sectors this may be a very viable option. However, if your competitive advantage is determined by price point, or your competition levels are high, be wary about a direct pass through.
In Seattle, some companies have started adding a “minimum wage surcharge” on purchases; however this strategy has resulted in tepid responses from customers and irate posts to social media. Some restaurants are changing their pricing models by eliminating tipping and rolling the service costs into the price on the menu. This allows them to alleviate the disparity in pay between kitchen and wait staff, resulting in less turnover as well as compensate for rising labor costs.
Improve retention: At first this may seem counterintuitive, since more senior employees tend to command a higher wage. However, turnover can be costly both directly in terms of hiring and training expenses, but also indirectly in lost productivity or a dip in customer service.
Engage your employees in creative ways to improve the workplace experience. This could include flexible work schedules, working remotely to reduce commuting days, providing professional development and advancement opportunities and creating a positive work environment. However, giving a well-earned raise to a loyal employee may be an exceptionally smart business decision.
Roles and responsibilities: Do you have the right people doing the right jobs in your organization? For example, making shop clean up duties part of a highly skilled machinist job may not make the most sense. Some of those lower level tasks could be completed by a less experienced and lower paid worker, maximizing the efficiency of your top talent.
This strategy also allows you to create a relationship with entry-level talent that can be grown over time. This is like a football team growing through the draft, rather than constantly signing expensive free agents. Additionally, cross-training employees for different roles provides redundancy and lowers employee replacement costs when turnover does occur.
Shifting from a labor surplus during the recession to a labor shortage of today requires forward-thinking strategies by all companies. Small businesses are most susceptible to cash flow shortages and rising fixed costs, creating more urgency in being ahead of the labor curve. Planning now can preserve your profits and give you a leg up on the competition.
Ryan Davis leads the Business and Applied Technology divison at Everett Community College.
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