Scott R. Coplan

False Cost

The Problem

Let’s assess our current global workforce shortage. The product, which is people or human resources, is in short supply like never before. There are many reasons for this shortage. For example, a large percentage of employees left the workforce during the pandemic and they are unwilling or unable to come back. Strict immigration policies combined with the pandemic encouraged employees to return or stay in their home countries. Others sought jobs in entirely new industries, joined the gig economy, or started their own companies, leaving employers with a fraction of available employees to fill open positions.
As a result, numerous employers now offer higher compensation to attract potential employees from the limited supply of workers. While several factors contribute to our current inflationary economy, many believe this higher compensation accounts for a significant part of it.
There are various ways to end inflation, such as, using price and wage controls, enforcing anti-trust laws to break up corporate monopolies that raise prices for greater profits only, relaxing tariffs to increase cheaper imports, investing in more production of what’s in short supply, reducing government spending, and so on. While there are various schemes, few offer proven direct benefits in ending inflation timely. Eventually, inflation stops principally because the problems go away, like a tight labor market or supply chain disruptions.

The Solution

If you accept prevailing wisdom, wages drop eventually even though the timing is unclear. And so does inflation — if it was only that simple.
Before the pandemic, employers paid for labor based on a market price. In this assumed post-pandemic era, employers now pay a much higher price for that same labor. While some of the difference is a function of demand that is much higher than supply, there is a drastic change in the labor market. Employees are now in a position to dictate employers pay a greater share of the true cost of labor. True cost is the difference between the market price of a product or service and the total societal cost for that item. Employees want, for example, competent leadership that attends to an employee’s needs, stronger relationships based on trust, more meaningful and personalized recognition for achievement, and increased coaching that fosters ongoing self and organizational improvement. Doing and sustaining all of this has a cost employers must pay now and continue to pay after inflation ends if they expect to find and retain employees.

It’s time employers stop paying a false cost for labor and embrace investing more in compensation for the long-term. Those organizations that don’t won’t survive.


Ela Chodyniecka, Aaron De Smet, Bonnie Dowling, Marino Mugayar-Baldocchi, Money can’t buy your employees’ loyalty, New York: McKinsey & Co., March 28, 2022.

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