This is the third article in a series examining the transformation of the American workforce during the pandemic. Part I looked at what is driving this change and Part II looked at the rise of $15 an hour as the de facto minimum wage in the private sector.
One area of a dynamically changing domestic labor landscape that has received little attention is the number of people striking out on their own and forming new businesses.
While many of those forming startups had small firms before the pandemic or are higher-paid employees breaking off from large firms, new business formations are reshaping the labor market in a way that bodes well for economic growth.
The U.S. census reported an extraordinary jump in the number of startups during the pandemic as measured by applications to open a business.
Current startups are nearly twice the pre-pandemic average of 230,000 a month.
Some of these are startups of the kind that attract capital based on a new idea; others, though, are people with deep expertise in a service area who break off from a large employer to form a consulting firm of their own. Or others are small storeowners—online or otherwise—who see opportunity in an economy upended by the pandemic.
While the number of new business applications has decelerated from its peak of nearly half a million per month in April and May to 430,000 in August and September, that is to be expected as the pandemic eases.
Still, current startups are nearly twice the pre-pandemic average of 230,000 a month.
We assume that these startups represent only a marginal reduction in the pool of available labor for low-wage employment, but it nevertheless reinforces what is already a seller’s market, adding further pressure on wage demands.
On the plus side, this is not a zero-sum game.
A new crop of entrepreneurs will grow the economy, adding to the number of customers and spending at established businesses.
Changing with the times
The prospect of increased entrepreneurship makes a good case for the successful transition to a new American model of U.S. economic growth.
This change in the labor force, following a period of stress, is nothing new. If anything, stress in the labor market and competition for workers have historically resulted in a significant transformation of the workplace.
Company-provided health care, for example, came about to attract employees during postwar wage restrictions. If the social safety net is not expanded, firms should expect competition among corporations within the labor market to meet the needs of the rapidly changing workforce.
What might that competition look like? As part of that transition, existing employers can partner with their employees, providing tuition benefits, flex time, immigration support and child care as well as the reassessment of the value of all of its employees. All are ways to increase retainment and improve recruitment.
This just scratches the surface of what is likely to take place as the economy works toward a new equilibrium in wages and benefits.
For management, a shrinking labor pool will require paying higher wages for low-income employees. Whether or not those costs are passed on to the consumer will ultimately rest with consumers who will reassess the value of what they are buying.
For example, the willingness to pay $4.50 for cup of coffee at Starbucks includes providing health care for baristas and allowing their participation in the labor force.
The takeaway
The shrinking supply of labor at the bottom of the income ladder is unlikely to be short-lived. Real wages have been in decline for decades and have arguably hit the inflection point for certain occupations, income levels and sense of self-worth.
Read more about these subjects and others in The Real Economy, a monthly economic report from RSM US for middle market business leaders.
