Did You Know the Reservation Wage is Now $61,500?

Did You Know the Reservation Wage is Now $61,500?

I’m a workaholic…meaning I study work…so come join me if reservation wage is a new term for you. It’s new to me, too. And it’s the jump-out piece of Time Magazine’s recent cover story on rethinking work.

Reservation wage, I’m learning, is the term economists apply to the lowest pay employees are willing to take to accept a job. In this example, $61,500 is the lowest annual pay that workers without a college degree are willing to take. Most full-time U.S. workers are paid for 2,080 hours per year…40 hours X 52 weeks…so dividing $61,500 by 2,080 yields $29.57, just short of $30 an hour. Economists have a formula they use to calculate reservation wage and if interested, it is available here. If you understand it, please call to teach me.

So at first glance it looks like any non-college grad you hire for less than $30 an hour is a bargain. Except most companies I know have entry-level pay far short of $30 per hour. So perhaps a more useful way to apply the reservation wage is to ask how much it has increased in the last few months.

And there is the rub. Economists tell us that the reservation wage for these same non-college grads has leaped a full 26% from March of 2020 to March of 2021. In hourly wage terms, these non-college grad workers were willing to accept $23.46 per hour just a little over a year ago but now they expect about $30 for each hour of work.

And they are holding out for it. The plurality of help wanted signs…seemingly everywhere…reflects many workplace issues. We have fewer workers than before the pandemic, some parents are still home with their school-aged kids, and some employees are hoping to work from home. But when restaurants can’t open, maybe it’s because new-thinking workers believe those restaurants don’t pay enough…leading to a record 1.2 million restaurant job openings at the end of May.[i]

It’s like our workers took a 12-month time-out to rethink their jobs and their lives. And commerce is on hold waiting for them to make the decisions that impact our businesses.

Let’s turn our discussion now from recruiting to retention with a few quiz questions:

Q. Do bosses really matter when recruited employees balance one offer against another offer while considering pay and other factors?

A. No. They will have at most just a first impression of their new boss…or no impression at all if they don’t meet their new boss before being hired.

Q. Will newly-hired employees still check Indeed or get calls from other companies trying to recruit them?

A. Yes, you can bet your next paycheck on it.

Q. When newly-hired employees see jobs that pay more, will how much they trust their boss in your company influence whether they chase those jobs?

A. Yes…and you’d better hope so because you’ll never win retention on pay alone.

This quiz outcome is reminiscent of the adage “Join for pay, leave for bosses”, isn’t it?

The pothole we step into is we high-five ourselves when we fill a job but forget to low-five ourselves when that same person leaves. Instead we receive yet another requisition to fill a job…the new-hire retention doom loop I talked about a few weeks ago. So what’s the fix?

  1. Establish a new-hire retention goal for the first 60 days or so…your turnover data will tell you how long.
  2. Hold everyone who gets in close contact with that new hire accountable for the goal including recruiters, trainers, supervisors, and team leads if you have them.
  3. Train those supervisors to conduct two Stay Interviews with new hires in that goal period…but they must learn to ask, listen, probe, listen some more, and solve at least one issue that is important to their employee.

This is one of many solutions we use to help companies like yours cut turnover by 30% and more. Write me if you want to learn more…DFinnegan@C-SuiteAnalytics.com.

[i] https://www.msn.com/en-us/money/companies/restaurant-workers-are-quitting-in-the-middle-of-their-shifts-reports-say-the-sector-is-facing-an-uphill-battle-to-retain-workers-amid-the-labor-shortage/ar-AAMvwOF

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