Commentary: Now Workers Can Flex Some Muscle

As labor markets tighten, employees are gaining bargaining power

In any economic expansion there comes a moment when the balance of power shifts to employees from employers -- a moment when the question of the day switches from "Can I get a good job?" to "Can we find enough good workers?"

That moment may have come for the U.S. On the surface, the latest employment report from the Bureau of Labor Statistics wasn't good news for workers. The unemployment rate rose in February to 5.4%, from 5.2% in the previous month. Nor did hourly pay increase at all.

A closer look at the numbers, however, tells a different story. The number of unemployed "job losers" -- those who are laid off or who otherwise involuntarily find themselves out of work -- actually fell in February. Instead, much of the increase in unemployment was driven by a surge in "job leavers" -- workers who voluntarily quit. Indeed, the number of unemployed job leavers rose to 965,000 in February, the second-highest monthly level since 1993.

In the past, such a sharp increase in people choosing to quit their jobs has been an indication of a power shift in the labor market. It shows that workers feel confident enough to leave their jobs -- and strong enough to bargain for higher wages. In mid-1985, for example, a rush of people quitting of their own accord briefly helped push up the unemployment rate. What followed, however, was 18 months of rising real wages, the first sustained increase in pay in nearly a decade. Similarly, there was a rapid rise in unemployed job leavers in the second half of 1996 -- and that was a precursor to the very strong real wage increases of 1997.

The same thing may be happening again. "The labor markets have firmed, and it's no longer a buyer's market for talent," says Laura Sejen, practice director of strategic rewards for Watson Wyatt Worldwide (WW ), a human resources consulting firm. "That's particularly true for critical skill employees and top performers. They have options."

Certainly that's the case for Paolo Asuncion, a graphic designer and production manager for a Silicon Valley ad agency. In 2004 he was working at a lower-level temp job at another company. But when that company offered him a full-time position, he turned it down. Not only was the pay too low, Asuncion says, "there seemed to be more opportunities out there." After looking for a month, he found his current job. And, he adds, his job responsibility and title are "at the level I was at before the crash" and his pay is "close to what I made before."

Asuncion's experience will likely become more common, even if the overall jobless rate doesn't fall much. Once the balance tips toward workers, corporate hiring behavior can change almost overnight. If employers find themselves with positions they need to fill, says Barry Gerhart, a human resources expert at the University of Wisconsin Business School, "all of a sudden they have to shift back to recruitment-retention mode."

There's other evidence that the labor market is on the cusp of change. In February, the Conference Board reported that just 22.6% of those interviewed in its monthly survey said jobs were "hard to get," the lowest reading since 2002. And the index of newspaper help-wanted ads, also compiled by the Conference Board, ticked up in February to 41 -- the highest in two years.

Plenty of pessimism still exists. Fears of losing jobs to China and other fast-growing rivals remain, some key industries such as telecom continue to cut jobs, and recent merger news will inevitably lead to layoffs.

But even that anxiety may soon melt away, with the economy growing at a stellar 4.5% clip since early 2003 and adding 3 million jobs over that same period, erasing the job losses of the bust. Workers are beginning to realize that the option of quitting a job to find a better one is very real -- and employers are going to have to ante up.

By Michael J. MandelWith Jennifer Merritt in New York

    Before it's here, it's on the Bloomberg Terminal.