How Do Firms Respond to Hiring Difficulties? Evidence from the Federal Reserve Banks' Small Business Credit Survey

Primary Issue

Understanding the sources of mismatch between the labor pool and the needs of firms is important. There can be significant variation in hiring challenges by type of firm, and how a firm responds may depend systematically on the nature of the problem. Data from the Federal Reserve Bank's 2017 Small Business Credit Survey allows for a closer examination of hiring difficulties and firm responses.

Key Findings

Two-thirds of firms report hiring difficulties, with considerable variation by type of firm. Firms located in rural areas and those seeking to fill non-bachelor's positions in industries that tend to have high turnover—such as leisure and hospitality and construction—were more likely to cite difficulty filling positions. The two most commonly cited hiring challenges are "lack of job specific skills, education, or experience" (63 percent) and "too few applicants" (57 percent). Regardless of the reason for hiring difficulty, the primary response is to increase compensation. Relative to otherwise similar firms, those citing "competition from other employers" or "too few applicants" are more likely to respond by raising wages, while firms that experience difficulty finding candidates with "job-specific skills, education, or experience" were more likely to say they "restructured existing employee responsibilities" or "loosened job requirements or offered more training." These results suggest many firms are facing labor cost increases due to hiring challenges, but they are a mix of both compensation and non-compensation expenses.

Takeaways for Practice

The results provide insight for policymakers trying to understand the linkage between compensation, labor market tightness, and productivity. While most firms are responding to hiring difficulties by increasing pay, many firms are also devoting significant resources to activities such as training and the restructuring of employee responsibilities. This may lead to lower productivity—at least in the short term. To the extent that labor shortages reflect a skills mismatch, workforce development practitioners need to be aware of the differences across industry, education requirement, and geographic location. Potential responses might include greater collaboration between schools and businesses to better align the skills of the workforce with job requirements. Additionally, targeted efforts in rural communities to boost labor force participation may be particularly beneficial.