It can’t be transitory

Let me tell you a fairy tale…

A massive recession hits and the boss of a company – let’s say they make shoes – gathers her employees into the main headquarters for an all-hands meeting. Everyone is there, from the executive vice presidents to the guy who waters the plants.

And she says, “Here’s the deal, gang…sales are going to fall by 20% this year and we’ll have no profits. We also don’t know when the economy will get better. My inner circle is telling me to lay off 20% of you immediately to make it through this period. But instead, I’ve decided to keep everyone and, rather than lay 20% of you off, I’ll just cut everyone’s compensation by 20%. How does that sound?”

You never hear about companies doing this. And do you know why? Because, from a psychological standpoint, it would never work. People don’t care about their coworkers as much as they care about themselves. So seeing someone else’s job get saved while you’re stuck doing the same amount of work for a fifth lower compensation will not motivate you in any way or make you feel good about the company you work for. It will depress you, and then enrage you. Depression is just rage turned inward, I learned from re-watching the entire Sopranos this past spring on HBO Max.

So, believe it or not, you would rather see your coworkers fired than be forced to do the same job for less. You won’t admit it out loud. Or even to yourself, in your own head. But it’s true. And Corporate America knows this, which is why recessions lead to layoffs, not compensation cuts. Experienced hiring managers know this, which is why bonuses can be given in a bountiful environment easier than raises can. Because you cannot take back a raise. You can always add to someone’s comp, slowly, little by little, over time. You cannot take a penny of that back once someone’s gotten accustomed to it. I mean, you can take it back, but then you’ll have an employee who hates you, hates the company, hates the customers, and if you multiply that by five or ten affected workers, your business is in trouble.

This is the number one way you know, for sure, that the salary increases currently happening in the economy are not going to be transitory. They’re going to stick. People are going to get anchored to them overnight. Customers of these businesses are going to see the increased costs associated with these higher wages passed along to them in the form of higher prices for goods and services. And these costs will not be reversed. Because the salary increases won’t be reversed. They can’t be. It’s contrary to human nature to accept a lower wage tomorrow for doing the same work you did today.

And everybody knows this.

If you were making $50,000 working at Enterprise and your employer had to pay you $55,000 to avoid losing you to the Avis across the street, that extra $5,000 annually is now your baseline in terms of what you will accept to stay at Enterprise. Even if the Avis closes down and there’s no more employment opportunity there, your current employer still can’t take anything back. They can let you go if they can find someone else who will take your job for the original $50,000, but that’s not how employers think in this economy. “Easier said than done, and besides, I already have this person who can do the job, doesn’t need to be trained, and is one less thing I have to worry about.” 

So when you hear the word “transitory”, remember that it simply can’t be. The pandemic and its aftermath shed a great deal of light on the fact that we really don’t have enough people ready to take all of the jobs we currently need filled in most industries outside of hospitality and leisure (although that is now changing too). Even before the pandemic we had millions of unfilled jobs. Now at 5.8% unemployment, we have millions more. The biggest problem for American workers today is not a lack of opportunity – it’s a skills mismatch. We used to have a bigger problem with people’s unwillingness to migrate to the better job markets, but that’s been completely flipped on its head as well. Now people are willing to completely uproot their whole lives and move anywhere. Boise, Idaho is the poster child example of this seachange in attitudes.

What might be transitory is gasoline prices and lumber prices and copper prices and used car prices and the like. That stuff we’re pretty good at producing a glut of once we have our production back to where it was. There’s not going to be a dishwasher shortage in 2022.

But you’re still going to have to pay up for the people who are making those dishwashers. And transporting them. And selling them on the showroom floor. That part’s not going anywhere.