Employers looking to hire employees in the new year are likely going to have to shell out more money than ever.
With inflation still high and the labor market still hot, the minimum salary that employees say they would take for a job—known as the reservation wage—has risen to its highest level. The new bottom line: nearly $74,000.
That's according to the Federal Reserve Bank of New York's November 2022 SCE Labor Market Survey, which explores the reservation wage and other employee expectations in the labor market. The survey asks respondents—who are employed, unemployed or out of the labor force—"Suppose someone offered you a job today in a line of work that you would consider. What is the lowest wage or salary you would accept (before taxes and other deductions) for this job?" The latest results found that, on average, respondents said it would be $73,667.
It's the highest level since the series began in 2014; results are published every four months. In a blog post exploring the data, researchers said the average reservation wage has been increasing for both employed and non-employed respondents since late 2017, but "more so since the onset of the pandemic."
The increase, perhaps unsurprisingly, is more pronounced for employed individuals: The average reservation wage increased by around 12 percent for non-employed respondents between March 2020 and November 2022, but by 19.4 percent for employed respondents over the same period.
The authors also noted the rising importance of nonwage benefits—such as health and dental insurance, flexible work arrangements, and maternity and paternity leave—in workers' employment decisions in the post-pandemic era.
The demand for higher wages comes in the midst of a precarious financial time for employees. As cost of living has soared, employees have struggled to keep up with expenses and have leaned on employers for pay raises, enhanced financial benefits, bonuses and other help. And a competitive job market, where many employees have their choice of opportunity, is giving employees more bargaining power in their demand for better salaries.
For instance, employees who say their pay isn't high enough are looking for other, better-paying opportunities. Data from Remote.co, a remote-work resource, finds that the vast majority of employees (80 percent) say their current salary is not keeping up with inflation, while 47 percent said these concerns have pushed them to find or start looking for a higher-paying job.
For these reasons and more, industry insiders say the fact that the reservation wage has increased is not unexpected.
"It is unsurprising that the reservation wage is climbing," said Amy Stewart, associate director of content marketing at Payscale, a Seattle-based compensation software firm. "Labor has enjoyed increased bargaining power over the course of the pandemic as job openings have been elevated well above pre-pandemic levels and workforce participation has been in decline. The demand for labor in correspondence with labor shortages increases demand for higher wages and better work experiences."
'Employees Are Competing in a National Labor Market'
Jeremy Feinstein, managing director at Empsight, a New York City-based human resource consulting firm specializing in compensation, said a big increase in virtual and remote work also is responsible for the increase in the reservation wage because it greatly expands the labor market and job opportunities.
"If you lived in a low-cost area in the past, your expectations to get a salary offer in the same geographic area were modest or low. But with virtual opportunities, you can now apply for a job in a national market for higher wages," he said. "For example, you could live in Birmingham and apply for a virtual job in New York."
David Cheatham, compensation consultant at Empsight, added that another factor behind the increase in the reservation wage is that the local labor market has expanded for front-line workers, who now have more options at higher pay. Because there is more competition, employers are offering higher wages. For instance, he said, employees who used to work in the hospitality industry can potentially find higher-paying jobs at new distribution centers, in retail or in the gig economy as delivery drivers.
Ultimately, "more employees are competing in a national labor market," Feinstein said. "Employees in low-cost areas are considering more nationally indexed compensation levels than in previous years. Even higher salaries are being offered for full-time in-office and hybrid jobs tied to higher-cost geographic areas than full-remote jobs."
Payscale's Stewart said rising unemployment and a decline in inflation will likely taper wage growth and, with it, the reservation wage, but demand for labor may remain strong despite fears of a recession.
"If inflation can be kept in check, rising wages and better benefits for the workforce could even reverse widening wealth inequality," she said. "For employers, it is important to think about the whole picture. Treating workers humanely, developing positive work experiences and adopting data-driven fair pay practices is the right thing to do."