Key Points

  • A tight labor market occurs when there are more job opportunities than available workers
  • A tight labor market could see an inflation spike and a consequential rates hike
  • Recruiting in a tight labor market doesn’t have to be that hard.

What does a tight labor market mean?

A tight labor market is a market cycle with plentiful vacant jobs and scarce workers. This usually happens when an economy grows super fast, and most employers are looking to expand their workforce. 

However, a tight labor market can also occur when there is a decline in labor force participation resulting from a rise in economic inactivity. While it is generally accepted that fewer workers cause market tightness, it is also accurate that workers participating in fewer work hours could also result in a tight labor market.

The COVID-19 pandemic saw most markets tighten due to employees having to work from home. That resulted in some cutting their working hours. As such, the number of new hires started to spike till the pandemic slowed down, and the national economies were revealed to have been heavily impacted, which led to massive layoffs.

Though there are still layoffs, the U.S. is showing an increase in new hires, with an average of 341K per month for the past 12 months and positive hire reports for the past 25 months. This data comes when the U.S. economy slows down due to inflation, a debt ceiling crisis, and a banking meltdown

These labor reports show that something happened during the COVID-19 work-from-home era that made people reconsider their work ethics and recalibrate their work-life balance toward working fewer hours. If this trend represents a permanent shift keeping the labor supply low, the country will likely face a tight labor market as its economy rebounds.

Factors contributing to the formation of a tight labor market

Most factors behind the formation of a tight labor market are short-term. However, structural economic changes can also be to blame. Some factors that may lead to market labor tightness include:

  • Accelerated retirements
  • Widening skills gap
  • Geographic imbalances in the labor pool
  • Too fast economic growth
  • Working population decline or immigration

Consequences of a tight labor market

Tight labor markets mean that the production targets of an economy may go unmet as the available workers may not be willing to overwork to hit the set quotas. Here are some of the consequences of labor market tightness in an economy:

  • This can lead to a crunch in supply chains as production is hampered by shortages due to unmet quotas.
  • This can lead to increases in the relative bargaining power of working people leading to a rise in union pay demands and or an increase in production costs. 
  • It can lead to cost-push inflation as employers pay higher rates to hire and maintain their key staff. 
  • It can result in embedded inflation rates that could affect the economy adversely. As such, it directly leads to interest rate hikes to control the embedded inflation risk.

Recruiting in a tight labor market

A tight labor market is one of the hardest times to acquire a star-studded team. However, that doesn’t mean you cannot build one. Here are some tips that you can use to build a great team during seasons with labor shortages

1. Tailor the hiring process to favor candidates

Ensure that your hiring process favors candidates by aligning it with a candidate’s point of view. Throughout the process, ensure you do not lose top candidates due to adjustment and negotiation times delays.

2. Market your organization

Develop attractive landing pages for your organization and explain all perks to employees well to give you an edge over other employers.

3. Develop an employee referral program.

Give incentives to employees who refer others to your organization

4. Focus on the active and passive candidates

Improve the working environments of the present candidates and workers to ensure that they will stick with you and develop a sense of loyalty.

5. Talk about Salary early.

Negotiate salary in the initial stages of discussion to align with the worker. However, be aware of making the hiring process lengthy as the worker may get a counteroffer.

6. Always be recruiting

Keep your recruiting window open to attract top performers to your organization and increase your chances of getting more employees.

7. Be prepared for counter offers.

Be prepared that some top workers and candidates may be given counter-offers to move away from your organization. Introduce bonuses and competitive salaries/ work environments.

What to avoid when developing a star-studded team in a tight labor market

  1. Underpaying/ being out of touch with marketplace salaries
  2. Not being realistic about temp-to-perm options
  3. Not maintaining contact with candidates throughout the process