The Impact of Rising Interest Rates on the Workforce

Many observers were surprised at just how resilient the American economy has been coming out of the COVID-19 pandemic. In fact, the American economy has been so strong that employers have been struggling to find enough workers to staff their operations.

Unfortunately, high demand for both goods and labor has often been met with limited demand. Employers have been struggling to find inputs to their production operations as well as workers to staff those operations, and prices for everything from used cars to eggs have surged across the country.

Enter the Federal Reserve and its aggressive (albeit, some would say, belated) attempts to curb inflation and cool off the U.S. economy through a series of interest rate hikes. The interest rate moves by the U.S. Federal Reserve Bank have had both positive and negative impacts on the labor market.

More Expensive to Hire Workers

On one hand, higher interest rates make it more expensive for businesses to borrow money to expand operations, hire new employees, or invest in new technology and equipment which can lead to a decrease in job creation and wages.

On the other hand, higher interest rates also mean that businesses will save money on their debt costs over time, leaving more funds available for investment into hiring and wages.

At the same time, employers were already faced with stiff competition for labor even before the fed starting raising rates, and many feel they simply can’t afford to skimp on attracting talent, even when the cost increases. Jon Hill, CEO and founder of executive search firm The Energists, argues that companies can and should find other areas to save instead.

“Payroll isn’t the first place you should be looking to save money in this kind of an environment,” Hill says. “Investing in your people yields dividends down the line, and a lack of qualified employees can ultimately lead a business into an even worse financial situation if it means you’re not able to provide the same quality of service,” he says.

Hill also suggests that employers remember that hiring and training represents an expense that will have less impact in the future if they focus on maintaining a full staff now.

“Paying your staff a competitive salary ensures you’re maintaining a high quality of talent, people who can bring more value to the team and will stay with you longer than someone you’ll hire for a lower rate,” Hill says. He recommends that employers look for ways to get more value from their team members, rather than cutting salaries or laying off employees. “For example, integrating automation or software that lets employees work more efficiently can boost their productivity, giving you more value for the same payroll investment.”

Reduced Demand for Goods and Services Often Means Reduced Demand for Labor

But not all companies will still need to fight for a limited supply of labor. In addition to these direct effects of increasing interest rates on job creation and wages, there is also an indirect impact that affects people who are already employed—when borrowing becomes more costly due to an increase in interest rates, consumers tend to rein in their spending, which can lead to a decrease in demand for goods and services. This can cause businesses to reduce the number of hours worked by employees or even eliminate jobs altogether if the decreased demand is large enough.

“We’ve had to scale down on recruitment by about 20% owing to the high interest rate environment we are currently operating in,” says Lisa Richards, the CEO and Creator of the Candida Diet.  The company, she says, has downsized its workforce by nearly 2% over the past two quarters to reduce costs to offset falling revenue and slower business growth.

In addition, Richards says: “We’ve also had to re-evaluate our payroll budget to uncover ways of reducing employee costs including eliminating some benefits and reducing total compensation for the majority of our workforce. We’ve been very transparent and forthcoming with our employees regarding each of these directives, and although the transition has been painful, employee engagement, morale, loyalty, and productivity have remained high.”

Timing Is Key

Pandemics, high interest rates and labor shortages impact the economy in different ways, but they hall have one thing in common: they’re transitory and temporary. Business leaders recognize this, and many are choosing to bide their time and hold onto the staff they have, even in a slowing economy, in part because they know how hard it will be to re-staff when the market inevitably swings back the other way.

“We don’t have any plans for laying off our staff, but on the contrary, a couple of months back, we hired and recruited for 3-4 tech positions and are satisfied with our decisions,” says Brian David Crane, founder of CallerSmart, a software company that provides caller ID authentication and cybersecurity applications. “Given an increase in demand for our particular domain (anti-phishing and data privacy software tools), our market is still stable. Another reason for our decision not to terminate or lay off is due to the challenges of rehiring. The additional costs of training new candidates for the job are also a headache which is better if we retain them.”

Overall, while higher interest rates may have some negative impacts on the labor market, they also provide an opportunity for employers to save money over time which could be used to invest in hiring and wages. It is up to individual businesses to decide how best to use these savings. Ultimately, it is important to keep an eye on the long-term effects of any changes in interest rates on the labor market as there are both positives and negatives that should be considered when making decisions about hiring and wages. With proper planning and management, businesses can use interest rate changes to their advantage to ensure that they are able to remain competitive in the current economic landscape.

Lin Grensing-Pophal is a Contributing Editor at HR Daily Advisor.

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