Harrowing hiring: navigating a hypersensitive job market.

• Author: Bachrach, Daniel

The San Andreas Fault, or California's Sleeping Giant as some call it, was responsible for the largest earthquake recorded in California at a measurement of 8.1 magnitude. That 1906 quake struck the heart of San Francisco and triggered deadly fires and killing an estimated 700 people. This sleeping-giant has been the center of many Hollywood films and strikes a chord with Californians who struggle daily with the reality that "the big one" could happen at any time. Californians hope that the events of 1906 will never be repeated, but the ever-present signs loom as a reminder of the devastating effects that nature can impose.

Quietly lurking in the surrounding counties of the San Francisco Bay Area, as well as other areas of California, is a different sleeping giant that has silently awakened. This one does not have the power to bring about great physical damage or cause bodily harm, but its effects have driven businesses to radically change how they operate. This giant can best be described as the hypersensitive job market that businesses navigate to effectively manage their labor requirements and associated costs.

Throughout San Francisco, for example, wages and benefits are at an all-time high, unemployment for eight of the nine Bay Area counties has consistently fallen below the national average, a younger work force is more selective in its hiring preferences and roughly one in three positions remain open after three months. Each of these micro-economic and social factors has resulted in additional constraints to managing adequate levels of staffing. Ultimately, this plays a significant role in the ability of businesses to attract and retain talent--at the time talent is needed. The lack of proper staffing, coupled with escalating labor costs, poses a number of significant risks to the viability of businesses.

Major Economic Risk: Wages

Silicon Valley continues to be the leader in wage growth across the nation. As wages have increased, surrounding Bay Area counties have followed suit to keep pace with the hiring market. In 2014 the average annual wage for Bay Area workers was $79,340, a 39.6 percent increase, using 2004 as a baseline. From 2013 to 2014, Bay Area average annual wages rose 910 basis points higher than the U.S. average. For a company with 50 employees, this represents $234,000 in additional wage expense (excluding benefits) for a single year when comparing to the U.S. average.

These wage increases have come at the expense of lower paid workers. Those making more than $100,000 in wages have benefited with nearly a 50 percent increase in their pay over the past decade, whereas those below $60,000 in wages have only seen a 30 percent increase over the same period.

A widening pay gap tends to impact businesses that rely heavily on low-skilled labor or businesses that hire on the lower end of the pay scale. This has prompted the need to become more creative in hiring efforts, which often comes at an additional expense. Online job boards no longer have the same effect they once had. Campus recruiting, job fairs, advertising in public venues, social media and compensation bonuses for referrals and retention have all become increasingly important in the quest to attract talent--but also come with added costs.

According to Jenny Cohrs, talent acquisition manager at Burr Pilger Mayer, Inc., "Professional firms, tech startups and private companies are till fighting for the same talent and there is not enough to go around. The balance of maintaining proper staff levels and relevant skill sets, while new business continues to flood through the door, forces recruiters to aggressively take creative approaches to getting those offers signed."

Businesses that cannot pass through wage increases to their customers are realizing eroding profit margins and lower levels of free cash flow. Products that are price sensitive...