In the past few years, the economy has shown signs of recovery. The S&P 500 has averaged above a 13% return over the past five years. But, interest rates have been held at an unprecedented low. This in turn makes bonds an unfavorable investment when compared to stocks.
According to the Federal Reserve Bank of St. Louis, seasonally adjusted unemployment has been on a steady decline. From 9.8% in November 2010, it fell to 5.3% in July 2015. The number of disengaged employees and applicants for open positions is declining as well. Recently, the job market has seen its highest level of voluntary exits in a decade.
In Jan 2015, close to 2.8 million employees quit their jobs voluntarily, up 17% from one year prior.
Employees are seeking higher pay in a market with an average salary increase of 2% - 3%. Economic indicators point towards growth.
But everything might not be as good as it seems The Fed increased the monetary base by more than 298% from 2008-2014. National debt is at an all time high, and interest rates at an all time low. The impending interest rate increase will only exacerbate our cost of debt. Debt payments will balloon, possibly causing increased volatility in the economy.
Could the stock market be experiencing irrational exuberance? The question is: are we in a boom, or are we just being set up for another bust?
Most importantly, how should this affect your labor budget in 2016?
As economic growth continues, some companies will continue to increase salary and incentive packages. If the economy booms, these companies will be ahead of the curve. Some cautious employers may hesitate to fully accept the changing market. Those cautious employers risk losing well-trained, high performers to offers from the proactive employers.
For the optimistic companies, labor budget increases might top 4%. In the case of the cautious financial institutions, labor budgets might be less than 2%. In both cases, I recommend starting increases with your top performers. Top performers are the employees most likely to become disenchanted with flat raises. More importantly, they are the first to gain confidence to begin a job hunt, as well as the most costly to lose.
Whatever you see on the economic horizon, focus your budget increases on high performers. These employees are the ones you can’t lose, and the most costly to replace. Rewarding your high performers first will always protect your investment in the labor budget, regardless of the economic future.