The combination of low unemployment rates and the labor-skills shortage has resulted in a record number of companies — 88 percent — reporting that they gave their workers wage increases, according to the 17th annual First Business Economic Survey of Dane County and Wisconsin employers.
Results of the survey were presented Wednesday at First Business Bank’s Dane County Economic Trends seminar at the Monona Terrace Conference & Convention Center. Overall, the survey indicates that local employers maintain a somewhat subdued sense of optimism about their business prospects in 2020, despite several economic headwinds.
The record number of local employers reporting wage increases is up six points over last year’s 82 percent, and it’s a trend that’s very likely to continue. Only 1 percent of respondents reported decreased wages in 2019, tying the survey’s historic low of 2015, and a record-high 81 percent of respondents predict still-higher wages in 2020, up from 77 percent the previous year.
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Dr. Moses Altsech Advertisement
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Jim Hartlieb |
According to Dr. Moses Altsech, who conducted the annual survey, wages must be looked at in the context of the pain that companies are experiencing with respect to the skills shortage. “A lot of people who perhaps didn’t have their expectations met this year, or their overall business performance was not as strong, one of the things they blame is the skills shortage,” Altsech states. “Translation: ‘I need more people but can’t find them.’ So, the wage increases are a reaction to that in the sense that people are trying to attract more qualified candidates.”
The same people also are trying to keep the good people they already have, which also puts upward pressure on wages. It’s not necessarily the immense pressure one would expect in a strong economic recovery, but it’s upward pressure. “Now, obviously, when you increase wages, either you’re chipping away at the bottom line or you’re planning to pass some of those cost increases onto your customers,” adds Altsech, who serves on the faculty of the Wisconsin School of Business at the University of Wisconsin–Madison. “It’s anybody’s guess as to which one will happen, but I wouldn’t be surprised if it’s a combination of both.”
Jim Hartlieb, president of First Business Bank, notes the No. 1 reason companies cited for missing revenue projections was not having enough people to do the work. This is not only driving wage growth, it’s a prime factor in their increasing reliance on automation. Hartlieb notes that artificial intelligence and mechanical and industrial automation now enables one person on a shop floor to work four or five machines. Ten years ago, there would be six employees operating those machines, so manufacturers have gradually been engineering solutions to the labor shortage.
“In other words, being able to do more work with less people,” Hartlieb explains. “That’s part of the evolving economy and business owners figuring things out. If you don’t have enough people to do the work, you have to change your process, and that involves automation, technology, and things like that. That continues to be a theme in this survey, as well.”
That trend could be accelerated by continuing wage pressure. Hartlieb notes that one of the top reasons given for lower profitability growth in 2019 was higher operating costs, including wage hikes, so companies will have to figure out how to control overall operating costs if wages continue to rise. “That might go back to automation,” he states. “It might be that we need to grow more to offset those wage increases, but I certainly see that continuing to be a challenge as we keep moving forward.”
For the time being, however, consumers are confident enough in the labor market to continue to spend, according to various surveys, and that’s propping up the national economy. Consumer spending accounts for roughly 70 percent of the economy, so even though the manufacturing and agricultural sectors are being undermined by the U.S.-China trade war, the labor market is so strong that people reason that even if they lose their job, they will find another one with relative ease.
“Let’s face it, anybody who is looking for a job right now is in good shape,” Altsech says. “If anything, the problem is the opposite. Anybody who is looking for employees is not in really good shape because they are hard to find. So, that that gives people a sense of security. They are making decent money, and they can afford things, so they buy things.
“Until there is real reason to worry, people are confident,” Altsech adds. “Memories are kind of short, right? You look at today, you don’t look at your situation 10 years ago and start becoming conservative. So, right now, there are plenty of jobs, the money is pretty decent, and if so-and-so fires me, I don’t care. That is reflected in the consumer spending.”
Resilient economy
The First Business survey was completed by 330 respondents in three regions in Wisconsin — Greater Madison, southeastern Wisconsin, and northeastern Wisconsin — and metro Kansas City. The survey focuses on the current year’s actual and next year’s predicted results in seven categories, including sales revenue, profitability, and hiring plans.
Local employers appear to be largely unaffected by the trade war and other damaging economic forces. About the time First Business Bank began reaching out to local business operators for the annual survey, the national media was filled with talk of recession, the trade war with China appeared to be heating up (not cooling down), and the economic toll of higher tariffs were becoming more apparent on Wisconsin agriculture and, to a lesser extent, manufacturing.
So, it was a bit of a surprise when the First Business survey revealed continuing — albeit somewhat weaker — optimism heading into 2020. How strong? Ninety-seven percent of Dane County business leaders expect improved or unchanged performance, up from 93 percent last year. Nearly seven in 10 (67 percent) expect to do better in 2020 (down from 74 percent the previous year), but only 3 percent expect to do worse and that’s down from 7 percent the previous year.
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For Hartlieb, among the themes that came out of this year’s survey are the continued optimism for 2020 — despite some headwinds — and the resiliency of the local economy. “Either they [local employers] are not impacted, or they have found ways to deal with those headwinds because the results from 2019 were strong,” Hartlieb says. “There is as much, if not more, optimism about 2020 as we had going into 2019. So, that tells me that business owners in general have figured out a way be successful in spite of those things.”
Nearly three out of four Greater Madison business executives (73 percent) reported that they met or exceeded expectations in 2019, and while that was down from the sky-high 79 percent that met or exceeded expectations in 2018, their continued strong performance in 2019 clearly impacted their expectations for 2020.
On the flip side of the coin, 27 percent reported worse-than-expected performance, up from 23 percent in 2018. As Hartlieb notes, of the 27 percent of respondents who reported not meeting their expectations, most cited the skills shortage as a primary obstacle followed closely by higher operating costs.
Among the survey’s other findings:
- 44 percent noted an increase in their number of employees, down from 2018’s historic high of 62 percent; only 1 percent project a decrease in number of employees in 2020, a new historic low;
- 58 percent saw a sales increase, down from 75 percent in 2018;
- 51 percent reported increased profits in 2019, just two percentage points below 2018; and
- 73 percent project higher sales revenue in 2020, down from 78 percent in 2018 but still historically strong.
Strategic direction
At the conclusion of the survey, companies were asked about business-improvement strategies that were implemented in 2019, and the top three responses related to accommodating the innovative process, the diversification of client bases, and brand re-assessment. Both Hartlieb and Altsech agree that this is where the focus should be and mention one recent business failure — Schoep’s Ice Cream Co. — to highlight the importance of client-base diversification. After losing two of its biggest customers and struggling to rebuild that business, Schoep’s went into receivership.
Hartlieb notes that client diversification has been one of the survey’s top two most cited strategies in recent years, and the importance of diversification is illustrated by the Schoep’s saga. “It’s a tough thing,” Hartlieb states. “They might be a profitable account. They might have been with you for a while, but they might also be 30, 40, or 50 percent of your revenue, which is not healthy, as Schoep’s unfortunately found out in their case. So, it’s still a good idea to continue to put strategies around reducing those concentrations, certainly below 20 percent and ideally in that 10 percent range.”
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