Getting Ahead of Rising Labor Costs

Companies risk losing the ability to deliver quality and service to customers if they don’t fundamentally rethink how to evolve their business model to incorporate higher labor costs.

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Widespread labor shortages and rising labor costs over the past two years have been blamed on short-run factors associated with the pandemic: government assistance and workers’ reluctance to go back to jobs where they still face health risks. But what if something bigger is at play here that is indicative of longer-term changes in the labor market that would require a fundamental rethinking of compensation strategy?

A survey of trends in labor costs and business model transformation over recent decades shows that we may be at a tipping point in terms of workers’ preferences and willingness to act according to those preferences to achieve the pay and working conditions they believe they deserve. If leaders want to maintain competitive advantage in the coming months and years, they may need to seriously consider fundamentally changing their approach to front-line compensation, job design, and career paths.

A Long Time Coming

Many telltale signs of the trends toward rising labor costs and increased employee demands for better working conditions were apparent before the pandemic. In the retail industry, entry-level wages started to increase substantially at bellwether companies such as Target, Amazon, and Costco in recent years.

Going back half a century, labor market trends laid the foundation for what we’re seeing today. In the 1970s, wages and employment opportunities in manufacturing were eroded when jobs were shipped to lower-cost locales in developing countries. The next transformation wave started in the 1990s: The internet enabled the transfer of high-cost knowledge work to lower-cost locales. The simultaneous era of business transformation saw massive gains in productivity, returns to capital, and a falling share of the total national income that goes to labor.1

A separate trend that has been well documented in the research literature but less well covered in business and political commentary is growing within-group wage inequality.2 This trend predated the internet revolution and was likely caused by the business model transformations of the 1970s and 1980s. These new models spawned a winners-versus-losers dynamic within occupations that previously offered much clearer career paths toward the middle class. In many of those occupations, including law, accounting, and finance, it used to be the case that getting a university degree and dedicating yourself to a career in that field provided financial security.



1.The Labour Share in G20 Economies,” PDF file (International Labour Organization and the Organisation for Economic Co-operation and Development, February 2015),; and J. Manyika, J. Mischke, J. Bughin, et al., “A New Look at the Declining Labor Share of Income in the United States,” PDF file (Washington, D.C.: McKinsey Global Institute, May 2019),

2. G.E. Johnson, “Changes in Earnings Inequality: The Role of Demand Shifts,” Journal of Economic Perspectives 11, no. 2 (spring 1997): 41-54; and A.F. Jones Jr. and D.H. Weinberg, “The Changing Shape of the Nation’s Income Distribution: 1947-1998,” United States Census Bureau, June 1, 2000,

3. E. Rosenberg, A. Bhattarai, and A. Van Dam, “A Record Number of Workers Are Quitting Their Jobs, Empowered by New Leverage,” The Washington Post, Oct. 12, 2021,; H. Long, “‘The Pay Is Absolute Crap’: Child-Care Workers Are Quitting Rapidly, a Red Flag for the Economy,” The Washington Post, Sept. 19, 2021,; and A. Bhattarai, “Warehouse Jobs — Recently Thought of as Jobs of the Future — Are Suddenly Jobs Few Workers Want,” The Washington Post, Oct. 11, 2021,

4. M. Faria e Castro, “The COVID Retirement Boom,” Economic Synopses, no. 25 (2021).

5. This is similar to the argument around “good jobs” in service sector businesses. In the current environment, I believe that we’re seeing a more pervasive issue that extends beyond service sector industries, given the issues happening in sectors such as warehousing, transportation, and distribution.

6. The origins date back to the early 20th century, starting with the contrast between the narrow assembly-line jobs created by Frederick Taylor and Henry Ford, versus the enriched jobs on the self-managing teams pioneered by W. Edwards Deming. It continued in the 1960s and 1970s with the social technical systems movement and concerns about the quality of work in America. In recent decades, the most vocal critics typically have derided “dead end” front-line jobs that offer no opportunity for advancement.

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