How Do Firms Respond to Hiring Difficulties?

Ellyn Terry
Mels de Zeeuw
Federal Reserve Bank of Atlanta
Community and Economic Development Department
Discussion Paper 2018-1
March 2018

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Using data from the Federal Reserve Banks' 2017 Small Business Credit Survey (SBCS), this paper investigates the various ways in which different types of firms with less than 500 employees experience and address hiring difficulties, including when they decide to increase compensation.

The authors find significant variation in hiring difficulties by type of firm, and a firm's response appears to depend on the nature of the problem. The most common response is to increase compensation, with firms that experience competition from other employers being the most likely to do so. Other common responses were to engage in nonproduction activities—like training and job restructuring—that may boost longer-run productivity.

The results provide insight for policymakers trying to understand the linkage between compensation, labor market tightness, and productivity. Further, the variation in hiring difficulties across firm industry, education requirement, and geographic location informs economic and workforce development practitioners and policymakers working to develop targeted interventions.

JEL classification: J01, J23, J24, J31, J32

Key words: small business, labor market, hiring difficulty, wages

https://doi.org/10.29338/dp2018-1


The authors would like to thank Karen Leone de Nie, Claire Kramer, Melinda Pitts, and John Robertson for their diligent feedback and suggestions, and Jeanne Zimmermann and Odie Swanegan for their editing and design support. Any remaining errors are the sole responsibility of the authors. The views expressed herein are those of the authors, and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

Comments to the author are welcome at mels.dezeeuw@atl.frb.org or ellyn.terry@atl.frb.org.