Bob Mendes | August 14, 2018

Nashville’s Labor shortage – just raise wages?

Since the beginning of 2018, our practice has been seeing financial distress in smaller, mostly retail-type businesses. There’s always more than one cause, but Nashville’s labor shortage is definitely one of the causes of the problems we are seeing.

One reaction that I hear is to ask why a business doesn’t just raise its wages. The reality is that this is not possible for some businesses…not without causing some other worse problem. For most businesses, the biggest expenses are people and space. And whether it is a long term lease or a bank loan for owned property, the cost of space is typically locked in for a long time. Also, we are in a period of growing inflation. For many businesses, with the costs of space locked in and inflation pushing up other costs, raising wages means raising prices.

The problem is that, if you have a competitor that is better able to manage their labor costs, you will have to raise prices before they have to raise them. Size doesn’t necessarily mean efficiency. But most often, if you run one or two retail locations, you have less flexibility to manage your labor pool than if you run twenty retail locations. The more efficient businesses are able to use existing profits to support wages without needing price increases. In this very low unemployment environment, if you are on the small or less efficient end of the spectrum, you’re stuck not being able to hire employees within your fixed cost structure (which is bad) or raising prices before your competitor does (which can be worse).

With Nashville’s unemployment rate being so low, I think we’ll continue to see more single location businesses getting chewed up by Nashville’s overheated labor market. If you see a larger operation go down, it’s possible that they just weren’t as good as their competitors in absorbing rising labor costs. For the most part, if they could raise wages to solve the problem AND not create an even worse subsequent problem, they would.

On a macro level, in 20+ years of doing this kind of work, this is the first time I’ve seen distress caused by very low unemployment. In my experience over the years, our practice has seen an uptick in business insolvency calls in advance of a downturn. So the fact that insolvency calls are up in 2018 definitely has my attention. However, experts on the economy say that things are great, and will keep going great for some time to come. I’ve got an open mind about what happens next. Will Nashville’s continued influx of new residents and the current culling of some businesses together solve the labor shortage and our local economy will keep blowing and going? Or are national policies that are intentionally heating up inflation and otherwise tweaking the economy in unconventional ways somehow breaking things? I don’t know. The only thing I know for sure is that, in my little pocket of the economy, phone calls about business financial distress are up this year.

Bob Mendes

Bob Mendes is a member of Waypoint Law PLLC representing businesses and business owners in a diverse range of matters, from bet-the-company litigation, to business reorganization and bankruptcy, to business planning and change management. Bob’s complete bio is here. You can follow Bob @mendesbob.