How have employers kept wages in check in the face of these extremely tight labor markets? The answer is unclear. However, two sets of strategies appear to have emerged. The first is common to expansions and involves widening recruitment, expanding training, upgrading existing workers, and/or lowering normal hiring standards. The second involves the use of signing bonuses, stock options, profit-sharing, and other forms of non-wage compensation.

Types of employer responses

Employers engage in a number of strategies in response to a shortage of workers.

Among the most common are:

• To increase recruiting, by advertising more, turning more to employment agencies, reaching a wider geographic area, and even paying recruiting bonuses to employees;
• To increase overtime work and turn part-time positions into full-time jobs;
• To reduce education and other requirements for new hires;
• To restructure work in ways that adapt to the available workforce;
• To substitute capital for labor;
• To expand the supply of qualified workers by conducting additional training;
• To improve working conditions;
• To offer bonuses, stock options, and other forms of non-wage compensation to new and/or existing employees; and
• To improve wages and fringe benefits.

Although employers generally turn to increases in wages and fringe benefits only as a last resort, a significant impact on wages usually emerges by this point in the business cycle. A natural explanation is that employers are choosing to emphasize responses other than wage increases over the current expansion. While the evidence concerning non-wage responses is spotty, individual cases and limited data suggest employers are indeed adopting the strategy of emphasizing non-wage approaches.

Training

The 1994 National Employer Survey (NES) of more than 4,000 employers, conducted by the U.S. Bureau of the Census on behalf of the National Center on the Educational Quality of the Workforce, University of Pennsylvania, gives a detailed picture of training patterns and expectations for growth over time. One striking finding is that over two-thirds of employers reported that the skills required to perform production or support jobs increased over the prior three years. More than three out of four employers said they had increased training outlays over the prior three years, while only about three percent or less had decreased their amounts of training. Employers reporting rising skill requirements on production and support jobs were especially likely to have increased training; 85 percent of this group increased training compared to 58 percent of employers who said skill requirements had not increased. In addition, the majority of employers projected a further increase in training.

Of the employers reporting an increase in training, more than 80 percent cited changes in the work process, such as changes in technology or changes in the structure of work. More than 60 percent attributed the increases to product changes, and 90 percent saw expanded training as a way of upgrading quality. In addition, nearly two-thirds of employers indicated that increased training was motivated by the fact that new hires did not have the necessary skills.

A Department of Labor survey (Frazis et al., 1998) undertaken in 1995 showed that 70 percent of workers received some formal training in 1995 and virtually all (96 percent) spent time in informal training. Formal training is training that is planned in advance and has a structured format and a defined curriculum. Much of the formal, employer-sponsored training involved only a modest number of hours.(1) Employees reported averaging only about 13 hours of formal training during a six-month period and about 31 hours of informal training. Reports by employers showed an even lower number of hours. Still, the costs of training, counting wages and salaries paid to trainees, tuition reimbursements, wages of trainers, and payments to outside trainers, amounted to more than $50 billion per year. The youngest (under age 25) and oldest (over age 54) workers experienced the least amount of training. Smaller firms provided somewhat less training, though few differences were observed between medium-size establishments (100-499 employees) and large establishments (500 and over employees). Firms implementing four or more new workplace practices, such as pay for skills, employee involvement in technology decisions, job redesign, quality circles, and self-directed work teams, reported almost twice as much formal training as other firms. Formal training varies significantly among types of workers. More training reaches the high-paid, well-educated, full-time workers, workers in establishments with medium or low turnover, and workers with long tenure at the firm. For example, 90 percent of workers with a BA or more received formal training, but only 60 percent of those with a high school degree or less did so. At the same time, average hours of training were higher among workers in the production, construction, and material handling occupations than among managers.

These BLS data contrast sharply with data reported by the OECD from the International Literacy Survey. Their report suggests only about 23 percent of workers received any job- or career-related training paid for by employers.

In any event, there is little indication that firms are providing depth in their formal training sufficient to raise significantly the capacities of less-skilled workers. Formal training averages less than one week per year. Despite these limitations, some firms are increasingly emphasizing training, not only to improve the productivity of existing employees but also to increase the supply of qualified workers in various fields.

Non-wage forms of compensation

Anecdotal evidence suggests firms are turning to bonuses and variable compensation as a way of attracting workers in today’s tight labor market. According to Louis Uchitelle (1998), signing bonuses are proliferating and reaching well beyond upper-level managers and skilled technicians.

A second expanding source of compensation is employee stock ownership and stock options. According to the 1994 National Employer Survey, 35 percent of employers were offering stock options to their workers. By 1999, the figure is no doubt considerably higher.

Whatever the facts, should policymakers promote compensation schemes linked to a firm’s performance? Might the apparent increases in bonuses and stock options help firms remain cost-conscious in today’s highly competitive environment? In the early 1980s, Martin Weitzman (1984) proposed “the share economy,” one in which compensation would be based less on fixed-wage contracts and based more on arrangements in which what workers received depended on the firm’s revenues or profits.

Research on the role of pay incentives in firm performance certainly predates the work by Weitzman. Many findings suggest positive impacts on productivity and profitability from shifting compensation away from fixed-wage contracts.

Notwithstanding the logic of the share economy, the advantages of an increased emphasis on profit-sharing or revenue-sharing might be illusory (John, 1991). In a profit-sharing firm, adverse shocks reduce profits and thus lower compensation per worker. Although firms have no direct incentive to lay off workers in this situation, they may be reluctant to allow average worker compensation to fall significantly. They may lose their best workers to competitors or may find that their jobs do not pay enough to deter workers from shirking. To avoid this scenario, firms may lay off workers even though the marginal workers do not generate any direct costs. Another possibility is that reduced compensation will lower the supply of labor and again induce reductions in employment in response to the shock to profits. Thus, while some labor market conditions suggest little gain from the shift away from fixed-wage contracts, other scenarios indicate more employment stability.

Already, the government encourages profit-sharing in a number of ways. There are special rules that provide tax advantages to workers and firms who create Employee Stock Ownership Plans (ESOPs). The tax treatment of stock options is also favorable. A worker receiving an option to buy his company’s stock at the current market price obtains something of value even when the option price is the current market price. Modern financial economics can place a value on these options. Yet, workers will not pay any tax on the options until and unless they exercise the options and sell the stock at a price higher than the option price. A key question is whether the government should do more to encourage these and other profit-sharing arrangements.

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By Robert I. Lerman and Stefanie R. Schmidt, The Urban Institute, www.urban.org