More workers call the shots as the labor market tightens. So who's the boss?

Adam Ozimek, Upwork's chief economist
Key Points
  • For 26% of small businesses in the U.S., finding qualified talent is the biggest problem right now.
  • The stronger economy means workers are dictating the terms of when and how they want to work.
  • Two ways businesses can prepare is by raising wages faster and embracing flexibility.
Tomaz Levstek | E+ | Getty Images

Nonfarm payrolls rose 225,000 for the month, well above Wall Street estimates, and the unemployment rate ticked higher, to 3.6%. Labor force participation rose 0.2% to 63.4%, matching its highest level since June 2013, according to data released Friday by the Labor Department.

But for businesses across the U.S., there seems to be a general consensus that hiring is a major challenge. In fact, a recent survey found that 26% of small businesses say finding qualified talent is their biggest problem right now — a 46-year high.

On the heels of the Great Recession, businesses may feel that hiring is impossible and bound to improve soon. But in 2020, businesses should prepare for a greater hurdle in their hiring challenge: an actual tight labor market where workers call the shots.

The idea that labor markets aren't tight — yet — will come as a surprise for many business owners who are currently feeling the pressure of hiring. And with unemployment at just 3.6%, the data may seem to be confirming that labor markets are tight already. However, the share of prime working-age adults with a job, which is a wider and more accurate measure of labor market tightness, is still below where it was for much of the late 1990s.

Even December's lower-than-expected job growth of 145,000 was more than enough to keep up with population growth. Additionally, when taking a step back and looking at the overall health of the labor market, employers are still managing to add 2 million new workers every year without raising wages at a fast pace. Does that sound like there is nobody left to hire?

To understand why businesses think it's hard to hire, it is important to keep in mind that it has been nearly two decades since the labor market has been genuinely healthy. Business owners and hiring managers have gotten used to the glut of workers that is characteristic of a weak labor market. They have not had to manage in a truly tight market in a long time, and many under the age of 35 have never had to do so. They have grown accustomed to applications rushing in without raising pay much and to workers who don't have much bargaining power.

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Now imagine instead of plenty of workers on the sidelines who need a job, it's two years from now: Hiring has continued apace, and labor markets are truly tight. Many who have the skills businesses need already have work, and the balance of power is in labor's hands. The stronger economy will mean that workers will get to dictate the terms of when and how they want to work and businesses should be prepared.

Aside from requests for wage increases and bonuses, more flexibility will be a top demand from talent. This will look different for every worker, but businesses should be prepared for demands for more flexible schedules and the ability to work remotely and even greater choice to be an independent professional.

Businesses should be prepared for demands for more flexible schedules and the ability to work remotely and even greater choice to be an independent professional.

We already see this shift occurring. Upwork's "Freelancing in America: 2019" (a survey Upwork co-commissions with Freelancers Union) found that for the first time since 2014, more workers are freelancing as a long-term career choice than as a temporary one. This shows that those who want to work independently are increasingly able to do so.

4 strategies to retain top talent in a tight labor market

This tightening labor market does not mean that businesses can't succeed, but it will mean that they need to prioritize hiring. This means investing and developing greater capabilities in one aspect of their business: finding and retaining workers. To do this, businesses will need to rethink their current strategies to accommodate this change in the labor market. Here are four strategies for hiring and retaining top talent in a truly tight labor market.

  1. Raising wages. While businesses have become accustomed to slow wage increases, the No. 1 strategy to retain current talent is to raise wages faster. The general rule-of-thumb cost of living increases may no longer suffice even if that is "how it has always been done here.''
  2. Accessing talent outside local labor markets. Businesses will find it increasingly advantageous to look outside of the local labor markets and hire workers remotely. Full employment will come to some places faster than others, and developing the capability to hire in places where there are still people looking for work will help.
  3. Embrace a flexible workforce. Businesses who want to cast the widest net possible, should embrace a more flexible talent solution. This means being open to both workers who want to be hired independently in addition to those who want to be hired full-time.
  4. Provide flexibility perks for on-site full-time employees. In addition to accessing independent professionals, business should also increase flexibility for their current workforce. This could range from hours to remote work policies, but businesses should offer these perks before employees demand them.
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For business owners, my advice is simple: It's time to prepare. While we are still not yet at full employment, take the time to understand and leverage both the risk and opportunity of tight labor markets. Businesses may not like having to work harder to hire, but that's a crucial ingredient for widespread prosperity. Growth in income for workers and broader opportunity to work in more places will spur consumer spending, and the economy overall will grow, which is ultimately in everyone's best interest.

—By Adam Ozimek, Upwork's chief economist