How inflation exacerbates the great attrition

Many fascinating analyses (e.g., here) have started to better understand the underlying causes of “the great attrition” — i.e., workers quitting their jobs in record numbers. Most recently, a comprehensive survey by McKinsey suggested that the phenomenon is fairly global, far from over, and has its roots in both behavioural, structural, and financial factors.

I have previously argued, and continue to believe, that to attract and retain talent, as well as to help people perform at their best, employers need to consider individuals as holistic human beings. This means paying as much attention to their psychological needs as physical and pecuniary needs. However, it’s also true that recent labour market data has highlighted the need to consider compensation.

Indeed, in the survey mentioned above, “Inadequate total compensation” came up as the second most quoted reason for quitting a previous job. A stylised fact is that, across the US and Europe, consumer price inflation in the last year ran at around 10% while employees’ compensation went up, on average, by 5–6%. In other words, the average worker took a real-terms pay cut of 4–5%. Another stylised fact is that quit rates are near all time highs, both in the US and the UK.

Of course, there is great variation in the figures by country, by sector, by occupation, and so on. What is fairly well established, however, is that workers who stay put in their existing roles tend to get significantly lower pay increments than those who move jobs. With significant pressure on household finances, this dynamic would be a significant incentive for some people to search for a new job with another employer.

Before looking at the data, however, I had not realised quite how big a difference this could make.

The #dataisbeautiful chart above shows the picture for 2021, which is similar to historical patterns. Between 2020 and 2021, hourly earnings in the UK for employees who stayed put in their current role went up by 2.9% (left hand column in the chart). In contrast, for those who changed not just jobs but also occupation, pay increased by 12.4% — more than four times as much (right hand column). Overall (light blue column in the middle), job changers’ compensation went up by nearly 10%, or more than three times as much as job stayers’.

While it’s unlikely that employees are scrutinising these statistics, it is likely that they are observing their colleagues and exchanging information about pay levels in different situations. Employers who don’t have a targeted and effective pay strategy therefore risk losing staff, which can be costly, especially in the current environment of tight labour markets.