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What's in Store for the Economy in the Year Ahead?

Experts say salaries will rise, inflation will fall and unemployment will remain low while unions continue to gain strength.

​In late January, professional services firm KPMG announced that it was pumping nearly $160 million into its salary budget to award raises to all of its roughly 35,000 employees. That may not be especially surprising in such a tight labor market. Just three months earlier, however, KPMG had announced major enhancements to its compensation packages that included salary increases, lower health care costs and automatic contributions to retirement accounts.

"The demand for our talent is high," says Jason LaRue, a partner and U.S. total rewards leader at KPMG. "We see the market as dynamic. We don't want our employees to feel we aren't supportive of them. We are going to continue to be agile."

This year, employers are widely expected to face a continued war for talent that will force them to fatten wages and enrich benefits amid falling unemployment. Wages and salaries for private industry workers jumped 5 percent in 2021, while the unemployment rate in February fell to 3.8 percent. This environment puts workers at a clear advantage that will continue to fuel the unionization momentum sweeping the country.

"Employers are going to face a tough year," says Lori Wisper, a managing director at WTW (formerly Willis Towers Watson).

Employers have more on their minds than just rising wages. The Russian invasion of Ukraine has added even more uncertainty to the economic picture. Many analysts had expected inflation, which hit a 40-year high of 7.9 percent in February, to moderate as pandemic-related supply chain snarls abated. However, the war in Ukraine will bring fresh challenges. Russia is a major producer and exporter of commodities such as natural gas. Meanwhile, both Russia and Ukraine are significant producers of wheat as well as neon and palladium, which are used to produce semiconductor chips.

"Just when we thought things were starting to come around, we hit another bump," says David Mitchell, a professor of economics and director of the Bureau of Economic Research at Missouri State University. "The 7.9 percent isn't good. The increase in gas prices is really hitting hard."

A gallon of regular unleaded gas recently hit an all-time high of $4.318, according to AAA. And the February inflation figure only includes the period covering the beginning of the war in Ukraine.

Federal Reserve Chairman Jerome Powell told Congress earlier this month that the bank intends to raise interest rates 25 basis points when it meets again later this month as part of a strategy to fight inflation.

"The near-term effects on the U.S. economy of the invasion of Ukraine, the ongoing war, the sanctions and of events to come remain highly uncertain," Powell said in a prepared statement. "Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook."

The COVID-19 pandemic is also a caveat to predictions. New variants are all but certain, according to public health officials, and reports of them have already emerged. How those variants will play out is unknown, though many economists don't think they will trigger the catastrophic lockdowns of 2020, thanks to vaccines and experience running businesses amid outbreaks.

"It is difficult to say what will be," says Frank Steemers, senior economist at The Conference Board. "Any new disruptions aren't helpful for businesses to return to normal operations."

Steemers notes that even though the omicron variant was less deadly than the original virus, some workers still needed to stay home, putting pressure on companies to raise salaries or causing them to turn away business.

Here are four predictions for how the U.S. economy will shake out in the next year—assuming there are no massive disruptions.

ATW_3-12_infographic_Economic Outlook_R3.pngUnemployment Will Remain Low

The stubbornly low unemployment rate perplexes some economists. Sure, people may be surviving on the generous unemployment benefits and other government programs designed to help displaced workers weather the pandemic. Still, 56 percent of people say they can't afford a $1,000 emergency, according to a recent Bankrate survey. So why aren't more people rushing to fill the vast amount of job openings?

When unemployment hit 3.8 percent in February, it was continuing a downward trend that began after the pandemic pushed the rate up to 14.7 percent in April 2020. "I had expected it to be higher," Steemers says of the February number. "I'm still expecting participation to increase again. Wages are rising. People will run out and join the workforce again."

Others aren't so sure. "There are these huge events [like the pandemic] that change household behavior," Mitchell says. The longer people stay out of work, the harder it may be for them to return, he notes, adding that households that had two working parents may opt to have only one return to the labor force if the household can live on less or is able to downsize.

"How much of that change is permanent and how much is transitory?" he asks. "We're still figuring it out."

Another question is whether the older adults who retired at a faster-than-usual pace during the pandemic will re-enter the workforce.

As of the third quarter of 2021, 50 percent of U.S. adults ages 55 and older said they were out of the labor force because they had retired, according to a Pew Research Center analysis of government data. In the third quarter of 2019, before the onset of the pandemic, 48 percent of adults in that age range had retired. Moreover, 70 percent of 65- to 74-year-olds were retired in the third quarter of last year, compared with 64 percent in the same quarter of 2019.

The Pew research notes the increase in retirements is important because before the pandemic, adults ages 55 and older were the only working-age population since 2000 to increase their labor force participation.

A WTW analysis of government data from 2010 to 2020 found that the labor force shrank 3.4 percent among those ages 16 to 24 and dropped 11 percent among those ages 45 to 54. The data shows the same result when analyzed from 2010 to 2019, demonstrating that this problem originated before the pandemic.

Wages and Benefits Will Continue to Increase

Just last month, Amazon more than doubled its maximum base pay to $350,000 from $160,000 because of the tight labor market, according to a memo obtained by numerous news organizations. Few companies will lavish employees with such largesse, but it demonstrates just how competitive the job market is, especially for skilled workers.

Last year, Amazon raised its average starting wage of workers in operations to $18 an hour. And just last month, Target raised its minimum starting wage to between $15 and $24 an hour, up from $15, for workers in stores and supply chain facilities and at company headquarters. The minimum hours needed to qualify for health insurance fell to 25 from 30, and employees gained faster access to the 401(k) plan.

Many companies are realizing that they are going to have to up the ante if they want to attract new employees and retain their existing workforce. It costs, on average, about one-third of an employee's salary to replace the employee, when accounting for factors such as lost productivity and hiring temps, according to industry experts.

In June 2021, a WTW survey of roughly 1,000 companies found that they planned to increase salaries by an average of 3 percent this year. By the fall, however, one-third of those companies had revised their estimates to 3.4 percent.

Similarly, a Conference Board salary survey in November projected that companies would drive salaries up 3.9 percent—the highest rate since 2008, and up from an estimate of 3 percent in April.

Those projections are still below last year's jumps, but a tighter labor market could very well push them up again.

Wisper says employers tend to be conservative when allocating compensation dollars. "We don't know how long this growth period will be sustained, and we want to be careful," she says, adding that employers are exploring other ways to reward employees, such as through better incentive programs and benefits.

That's already happening: Last month, Thomson Reuters expanded its benefits. The multinational media conglomerate introduced a program that allows employees to work in another location in their country for up to eight weeks. It also added 10 paid days off for employees who need to care for a sick or injured immediate family member and for those dealing with the loss of an immediate family member. (Three paid days off are available to employees who lose a member of their extended family.)

"With the pandemic, the imperative for employers to provide flexible working environments and support for employee well-being became clear," a company spokesman says. "Now, with the emergence of the Great Attrition, competition for talent is intensifying and more than ever, in order to attract and retain talent, employers need to differentiate themselves in the marketplace."

Union Organizing Will Continue to Flourish

It seems that every other day workers at a Starbucks store announce their intention to unionize; so far, employees have succeeded in at least six stores. Employees at the REI store (the retail and outdoor recreation services corporation) in Manhattan recently voted to unionize, and a vote is set for workers at an Amazon plant in Alabama. Meanwhile, unions have been dipping into new industries such as technology. Workers at the Raven Software division of gaming company Activision Blizzard announced that they formed a union earlier this year. However, the company, which is slated to be acquired by Microsoft, said it won't acknowledge the union. The activity comes after an unusual burst of strike activity late last year, with the 10th month of 2021 becoming known as "Striketober."

A combination of low unemployment and devastating experiences during the pandemic have given workers more power and confidence than they've had in years, experts say.

"The pandemic laid bare how terrible work can be," says Margaret Poydock, a policy analyst and government affairs specialist at the Economic Policy Institute, a left-leaning think tank in Washington, D.C. During the pandemic, some workers went without premium pay and protective gear, with many getting sick or dying. "Unions can be a vehicle to improve your conditions," Poydock says.

However, union membership in private companies has been declining for years, and 2021 was no exception. Union membership dropped by nearly 250,000 people, pushing the membership rate to 10.3 percent from 10.8 in 2020, according to the U.S. Bureau of Labor Statistics. Only 6.1 percent of private-sector workers are unionized, a historic low.

Poydock attributes the decline to layoffs during the pandemic. "There is definitely an interest in unions," she says. According to a Gallup poll, 68 percent of Americans approve of unions, the highest amount since 1965.

Union advocates say their push is stymied by labor laws that don't adequately punish companies that undermine organization efforts. Last year, the House passed the Protecting the Right to Organize (PRO) Act of 2021, which would ban actions such as hiring permanent replacements during strikes and forcing employees to attend meetings where they are discouraged from organizing. It also provides for companies to face civil penalties if they violate labor laws. It's unclear if there is enough support for the PRO Act to pass the Senate, though President Joe Biden championed it in his recent State of the Union address. The outcome is likely dependent on the results of the midterm elections. Opponents of the bill say it would hurt small businesses and make employers vulnerable to legal action.

The issue won't go away in such a tight labor market. "Unions go to the heart of their [members'] leverage," Wisper says.

Inflation Will Still Likely Fall

Before the war in Ukraine began, many economists predicted the supply chain problems that helped drive inflation to a four-decade high would finally start to soften.

That still may happen, but the uncertainty caused by the Russian invasion of Ukraine has economists rethinking their projections. Prices for products such as semiconductor chips will likely jump because Ukraine and Russia produce key elements needed in their production. The chips are used in everything from cars to appliances to computers to phones, so the cost of those items will rise. Mitchell says it will take at least a couple of months for the supply chain issues stemming from the war to manifest themselves in economic figures.

In the meantime, the Federal Reserve will be raising interest rates, with the first hike set for later this month. No one knows how many times the Fed will increase rates or by how much. Some of that could be affected by the war in the Ukraine. Mitchell says if the U.S. government needs to borrow money to help finance support for Ukrainian war efforts, the Fed may be less aggressive in raising rates because it will increase the country's borrowing costs.

The question is whether interest rate hikes will be large enough to counter higher prices caused by supply chain issues. "There are competing forces," Mitchell says. "There is going to be a tug of war."

The Federal Reserve was already facing a balancing act. "The Fed is trying to find the sweet spot between getting people to save and getting them to spend," Mitchell says. He thinks some spending will fall as people go through the savings they amassed during the pandemic from government subsidies and not going out as often.

The Federal Reserve has seven more open meeting this year, and Mitchell predicts that each will include a raise in interest rates. Mitchell had predicted that inflation would fall to between 3 percent and 4 percent by the end of the year. Now he thinks it will go down to 5 percent.

Theresa Agovino is the workplace editor for SHRM.

ATW_3-12_sidebar_Economic Outlook_R2.png

As the nature of work and the economy change, Erica Smiley and Sarita Gupta wanted to help ensure that workers' rights and needs are central to this transformation. The duo wrote The Future We Need: Organizing for a Better Democracy inthe Twenty-First Century (Cornell University Press, 2022), which explores the history of the labor movement, profiles union leaders and discusses new approaches to collective bargaining.

Gupta is the vice president of U.S. Programming for the Ford Foundation and was formerly the executive director of Jobs with Justice, a nonprofit focused on workers' rights. Smiley succeeded Gupta at Jobs with Justice after working there for years. She has also spent time as a union and community organizer. The pair recently spoke to All Things Work about their book and the future of work.

ATW: Why did you decide to write the book?
Gupta: We're in a moment of pretty great transformation in society, and choices are being made. It's important that we understand that workers can and should help influence these changes, and they can do so through collective action. We think it's really important that we understand that collective bargaining really needs to be transformed for the modern workplace and worker. We have to rethink collective bargaining. It's no longer one set of workers. You have contractors and subcontractors. You see more hedge funds and private equity funds that own companies. It isn't a family. We have to have more clarity about who the ultimate decision-makers are.

ATW: How does the future look different from organized labor now?
Smiley: I don't think we're trying to throw out traditional unions. We want to expand beyond the types of existing employer relationships. A lot will be situational.

ATW: Can you give some examples?
Gupta: Independent contractors are coming together and thinking strategically. Take domestic workers [who legally can't unionize]. New York state passed a domestic-workers bill of rights. The city of Seattle has come up with standards for domestic workers that set wages and health and safety standards. It's happening in Philly. Handy [a website that connects domestic workers and other service providers with customers] sets standards for what wages should be. The standards are a firm policy.
Smiley: The laws need to change. We want it to be costly if companies break labor law. Now it's a minor fee. We need to make it easier to unionize. But simultaneously we need to think about how we anchor labor protections. Another thought is to look to agencies [beyond the National Labor Relations Board] to set standards. We have to think far beyond one channel. The Handy contract is a labor contract. It is a contract.

ATW: What happens in the meantime?
Gupta: There are going to be more strikes. It's a question of how we will meet this moment. —T.A.

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