Market forces

from Baton Rouge Business Report, July 2021

Moving Up

Struggling to fill jobs, employers are increasing wages to attract and retain workers. BY CAITIE BURKES

FOR THE PAST two years, Benny’s Car Wash owner Justin Alford has been offering a starting hourly wage of $12, which is already 66% above the federal minimum wage of $7.25 per hour.

But within the past few weeks, Alford has raised the starting pay at his three B-Quik convenience stores in Baton Rouge to $14 an hour. The reason? He can’t find enough help there, or in his IT department.

“If you’re paying the minimum wage now, you’re in trouble,” Alford says. “We’re trying to stay ahead of the curve.”

What Alford is doing falls in line with a trend now playing out among more and more local business owners, who have begun offering higher wages in an effort to combat the labor shortages they’re experiencing.

It may come as a surprise that Baton Rouge is facing a major labor shortage, given the fact that the area reported that 26,839 people were jobless in April—a 6.4% unemployment rate, according to the U.S. Bureau of Labor Statistics. The potential theories behind this disconnect vary, though all are plausible and may even be interlinked.

As for the “curve” Alford mentions? In the first quarter of 2021, private workers across the U.S. saw a 3% wage growth on average—the strongest growth rate since the 1990s.

Louisiana is one of only five states without a state minimum wage, according to the Louisiana Budget Project, a left-leaning think tank. This means many workers must stomach the $7.25 federal minimum wage, which has not been raised since 2009.

But amid a tight labor market,

BASIC ECONOMICS: Justin Alford, left, owner of Benny’s Car Wash, has raised starting pay an additional $2 per hour to attract workers for his three B-Quik convenience stores.

DON KADAIR

competition is becoming stiff as some national companies with Baton Rouge locations boost their wages. Take McDonald’s, which is upping wages for the 36,500 hourly workers at its company-owned stores by 10%, or Bank of America, which announced it would raise minimum wages for its hourly workers to $25 an hour, from the current $20, by 2025.

What’s more, employees at the new Amazon fulfillment center at the shuttered Cortana Mall site will make $15 an hour, further pushing local companies to up their game.

As is apparent throughout the state’s capital, a cocktail of market forces may pressure the private sector to increase wages on its own.

WHAT IT MEANS

Stephen Barnes, who serves as the independent economist on the Louisiana Revenue Estimating Conference, says the state is beginning to see businesses respond to the labor shortage in various ways, including higher wages or, in some cases, signing bonuses.

Over the next few months, Barnes expects businesses will attempt to return to full-scale operations, while people will weigh whether to return to work amid child care responsibilities, health concerns and other considerations. During this short-term tightness in the labor market, he says it’s reasonable to anticipate wages will be pushed up, especially for lower-paid service industry jobs.

And, as Barnes notes, wages tend to be “sticky.”

“As wages go up, it’s unlikely they’ll slide back down,” Barnes says. “When the labor market tightness eases several months from now, we’ll be looking at a new normal in terms of standard rates of pay.”

However, he’s quick to point out that the market is being heavily influenced by some very atypical forces, including the lingering effects of a global pandemic and the federal policies tied to it. Essentially, Barnes says, some of these factors are discouraging workers, while others are keeping enough money flowing to encourage businesses to work harder to recruit employees.

Then, there’s the question of inflation: While the market may be pushing up wages, is it also pushing up prices?

With conversations surrounding minimum wage typically taking place within the broader context of affordability and quality of life, Barnes says it’s likely that inflation will play a key role in the case for increasing wages. Nonetheless, he says Louisiana, which has a relatively low cost of living, won’t see as big of an impact from inflation as, say, New York.

“It’s important to keep in mind how important geography is to standard of living,” Barnes says. “Even if we see companies like Amazon set up shop here, their wages are not going to have a similarly sized effect in terms of pushing up the cost of living here.”

In a state like Louisiana, which has long been resistant to increase worker pay, wage growth won’t affect companies’ bottom

lines right away. However, it could start to squeeze profits down the road.

In addition to labor costs, employers are seeing other costs rise such as those for packaging, raw materials and shipping. But unlike these other temporary increases, labor costs stay on a company’s balance sheet.

“It’s not guaranteed this becomes a margin problem, but it represents a legitimate threat to margins,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse, told CNBC in May.

But the disparity between labor costs and profits has been so wide for so long, some experts say, that employers should be able to increase pay if they can raise prices for goods and services or improve productivity.

For certain businesses, raising employee wages could also necessitate raising prices. At Benny’s Car Wash, for instance, Alford has had to raise the price of an oil change, due in part to rising labor costs as well as the escalating costs of oil and soap amid supply chain issues.

“If the cost of doing business goes up for us, it has to be passed on to the consumer,” Alford says. “Just look at the price of gas around town.”

For Alford, the results of offering a higher starting pay have, so far, been mixed. To date, he’s still shorthanded, though he remains optimistic about hiring over the next few months.

“We just had a job fair, and I was pleasantly surprised,” Alford says. “We may start to see hiring pick up again.”

AMAZON EFFECT: Entry-level wages are expected to keep rising as several Amazon facilities—like this one in Port Allen—offering $15-an-hour starting pay are set to open in the near future.