Employers’ K-shaped recovery: The labor shortage is affecting everyone, but some have set themselves up for a faster recovery

Not all employers are recovering from the Covid-19 pandemic equally. 

Three years into the pandemic, a historic labor shortage continues to bedevil many businesses. While there are signs of recovery for some, certain industries and companies are poised for a faster talent revival than others. 

Call it employers’ version of the K-shaped recovery. 

A K-shaped recovery refers to some groups recovering from an economic downturn more effectively than others. While it has referred to individuals, it’s also apparent in the labor market where employers have faced divergent outcomes in their attempts to rebuild their workforces.

While on the whole we’ve seen employers make progress in rehiring their employees, certain industries and companies are recovering quickly while others are struggling to attract and retain the workers they need. 

As workers return to work, in many cases there is not a one-to-one match between the jobs they left earlier in the pandemic and the jobs they are returning to. This is in part because the talent shortage has enabled workers to look at the landscape of job opportunities and “shop around” for the jobs that provide the best employee experience and alignment with their needs.

This has led to a lopsided “Great Reshuffling,” with some companies coming out on top because they have made major investments in their employee value propositions — namely with education, skilling, and mobility — that allow them to better attract and retain talent while others who haven’t made such investments struggle. 

 

A labor shortage of unequal magnitudes

According to the latest numbers, there are 6.5 million unemployed people but 10.9 million job openings. Turnover and quit rates in the US are at unprecedented levels, with various industries faring better or worse than others. The food service, hospitality, and retail industries, for instance, have many openings but have struggled the most to win back their workforces. 

Meanwhile, the manufacturing, construction, and warehouse industries have experienced hiring booms: “The warehousing and storage industry is one of the few sectors where employment is actually higher than before the pandemic,” noted Bloomberg in October 2020. In that first full year of the pandemic, “1.25 million people were on payrolls in September, about 46,000 more than in February.”

Disparities in labor shortage challenges not only appear across industries but also across types of work. For instance, rehiring and retaining frontline workers has been more difficult for many employers compared to their white-collar openings. As corporate HR advisor Josh Bersin put it, “I think it’s time to wake up. The service economy is now the center of the economy, and service workers are the new high-tech workers.”

 

A new era of employee expectations — especially on the frontline

One reason some employers have struggled to rehire their frontline and service sector employees is that pandemic-related concerns that discourage people from returning to the labor force, disproportionately affect these workers. Lack of affordable childcare options, and the fear of exposure to COVID-19, for example, have kept many workers on the sidelines. 

Retirements have also been a big driver of the shortage. About 70% of the 5 million people who left the workforce during the pandemic are over the age of 55 and many do not intend to return. All this means that businesses, especially those that heavily rely on frontline workers, are facing more competition for a smaller pool of candidates.

Evolving expectations on wages and benefits also help explain why talent has been slower to return in some industries than others. The Center for American Progress reported in December that quit rates for “production and nonsupervisory employees” were highest in the accommodation, food services, and retail industries – these are the industries where compensation is the lowest. Similarly, these industries also had the highest rates of unfilled jobs.

Workers are looking for employers who will meaningfully invest in their quality of life. 

In March 2021, Gallup reported that millennials and Gen Z workers (those born between 1980-2001) prioritized an employer that cared about employees’ wellbeing. Investing in employee wellbeing used to mean standard health insurance and paid time off, but benefits such as flexible work schedules, mental health resources, robust parental leave policies, and career development and mobility are now considered table stakes.

If companies can offer things that improve wellbeing and offer opportunity, they have a better chance of retaining workers among populations with high turnover. A January Harvard Business School study found that many low-wage workers would prefer to stay at their current employers and 62% said opportunity for advancement would make them more likely to stay. 

COVID-19 lent a renewed sense of urgency to these sentiments. Employers who have not made the proper investments are likely to find themselves recovering from the labor crunch at a glacial pace — if they recover at all.

 

“Shopping around” for the best EVP

Before the labor shortage, many employers benefited from the high “switching costs” experienced by employees who wanted to change jobs. Finding a better job was time-consuming and risky, particularly for lower-paid workers. But, in a number of ways, the pandemic reduced these obstacles for frontline workers. Unemployment benefits gave employees who were laid-off time to assess the landscape of job opportunities. As the economy recovered, the high number of job openings lowered the risk of leaving an existing job and finding a new one. 

The lower risks and higher rewards for changing jobs have encouraged workers to shop around for the best deal. 

You can see this in the record-shattering number of quits, high volume of hiring, and relatively low job growth reported by the BLS in recent months. As Julia Pollak, an economist from the jobs site ZipRecruiter put it in The Washington Post, “These are not quits from the labor force but quits from lower-paying jobs to higher-paying jobs, from less prestigious jobs to better, more prestigious jobs, from less flexible jobs to more flexible jobs.”

With so many companies ravenous for talent, those who have made strides to boost their employee value proposition (EVP), either before the pandemic or during, are pulling ahead. By emphasizing their investments in education, reskilling, and career mobility, they’re shoring up their internal pipeline, recruiting talent from other companies and industries with worse EVPs, and positioning themselves on a faster path to recovery and growth.

Take Target. Despite facing an unprecedentedly challenging labor market in the retail industry, it had a lower turnover rate for its hourly workers in 2021 compared to 2019. During a November earnings call, COO John Mulligan noted that the average number of hours a store employee worked was higher in 2021 than in past years, and the company added 100,000 temporary workers for the holidays. Mulligan attributed this to Target offering employees flexible schedules, a higher starting wage, bonuses, expanding benefits packages including education benefits, and more training for different job positions.

Before raising its hourly wages in September, Walmart announced in July 2021 that it would pay 100% of college tuition, including books, for its 1.5 million part- and full-time associates. Known as Live Better U, its education program is available on the first day of employment and includes certificates in digital technology and the skilled trades. 

By the third quarter, Walmart hired 200,000 workers, most of them for full-time or permanent roles, to meet the demands of the holiday season and beyond.

 

Keeping up is critical

The pandemic has and will continue to affect most businesses. But how fast employers can bounce back depends on how much investment they’re willing to make in employees. For companies most vexed by the labor shortage, there is still a possibility to “lose less.” 

Making deep investments in EVPs, like offering a robust reskilling and training program, career development, and opportunities for mobility, employers can land in the “top half” of a K-shaped recovery.



Written by Colton Heward-Mills



Principal, Corporate Strategy