The Hidden Fallout of the Great Resignation’s Hiring Boom
The 2021 Great Resignation sparked a ZIRP-fueled hiring frenzy with sky-high salaries, but now companies face layoffs and a financial reckoning.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.”
It’s easy to conjure Charles Dickens’s famous quote from A Tale of Two Cities when reflecting on the period of time from 2021’s Great Resignation through today. So many U.S. workers have recently experienced a juxtaposition of hope and despair, opportunity and uncertainty, prosperity and hardship.
To better understand where we are today, we must return to the convergence of events in 2021 that brought us here.
During the seismic shift of the Great Resignation, millions of workers leveraged a tight labor market to secure better pay, perks, and positions. In this era of Zero Interest-Rate Policy (or ZIRP), easy money, particularly in the tech sector, led to salary inflation that has left a complex legacy, marked by subsequent layoffs and a reevaluation of compensation strategies across industries.
It was the perfect storm of demand, capital, and mobility.
ZIRP-FUELED GROWTH
During the Great Resignation, the Zero Interest-Rate Policy significantly contributed to the hiring bonanza.
This policy, which maintained extremely low interest rates, enabled companies, particularly in tech, to access cheap capital, fostering an environment of aggressive growth and expansion. It was blitzscaling on steroids.
As a result, businesses were more inclined to increase their workforce rapidly, offering the high salaries and attractive perks needed to draw top talent at the height of the Great Resignation. This period of easy money allowed companies to invest in ambitious projects and expand their operations, leading to a surge in hiring.
However, as interest rates began to rise, the economic landscape shifted, and the same companies needed to adjust to the new financial pressures, often resulting in layoffs and a more cautious approach to hiring.
THE SURGE AND ITS AFTERMATH
At the height of the pandemic in 2021, a significant 4% of the workforce, emboldened by a white-hot job market and shifting priorities, decided to leave their jobs in search of better opportunities.
According to a report by the ADP Research Institute, U.S. wages for existing job holders rose by a record 5.9% in December 2021 compared to the previous year, while those who switched jobs saw an average wage increase of 8%. This trend was not isolated to the U.S.; it was a global phenomenon, pushing salary budgets to their limits.
This mass exodus triggered widespread salary hikes as companies scrambled to attract and retain talent. Industries like technology and finance saw some of the most dramatic spikes, with reported salary increases of up to 20% in certain sectors.
These salary hikes during the Great Resignation contributed to inflationary pressures. The Federal Reserve Bank of Chicago noted that the Great Resignation raised inflation by around 1% over 2021. This wage increase, coupled with other economic factors, led to a spike in the cost of living, complicating the financial landscape for both businesses and individuals.
As the economic landscape shifted with rising inflation and looming recession fears, the ripple effects of these salary increases began to show. Companies that had once thrown lucrative offers to attract employees faced financial strain.
This led to a wave of layoffs, most notably, again, in tech, where giants like Amazon and Meta significantly reduced their workforce. According to Layoffs.fyi, a tracker of tech layoffs, over 500,000 tech workers have been laid off since 2022.
LONG-TERM IMPACT ON EMPLOYMENT
The repercussions of salary inflation are multifaceted. On one hand, employees who secured high salaries during the Great Resignation are now often seen as expensive assets, making them vulnerable to an economic downturn. This has led to job insecurity and dampened wage growth prospects for remaining employees, who may already feel jaded by the salary discrepancies of new joiners.
On the flip side, companies are reevaluating their compensation strategies. Many are shifting focus from high base salaries to performance-linked bonuses and benefits, aiming to align pay more closely with business outcomes and economic conditions. This shift could mean more sustainable wage structures, but also poses challenges for employees accustomed to high fixed salaries.
RETHINKING COMPENSATION IN A POST-RESIGNATION WORLD
The lingering impact of salary inflation raises important questions about sustainable compensation practices. While the initial salary hikes brought significant short-term gains for many workers, the long-term sustainability of such practices is questionable.
Companies are now tasked with balancing competitive compensation and financial health, a challenge that will define the labor market dynamics in the coming years.
Another factor that companies must navigate is the imbalance between employee and CEO compensation. In 2023 the CEO-to-worker pay ratio increased to 251-to-1, with CEO compensation rising by 11.3% while median employee pay declined by 9%.
As we move forward into a world of work with more pay transparency, both employers and employees will need to navigate the complexities of a transformed workplace landscape. The lessons learned from the Great Resignation could well inform future strategies, making total rewards and flexibility, performance, and sustainability key components of compensation packages.
In the future, employers must improve their ability to tell the full story of what employment entails—beyond compensation. Career growth, how you approach workplace flexibility, training, and work environments will all be data points candidates will assess when making career decisions.
The aftermath of salary inflation is a sobering reminder of the delicate balance between employee aspirations and business realities.
As we continue to untangle the effects of the Great Resignation, it is clear that a thoughtful approach to compensation will be crucial to creating win-win long-term economic stability for companies and job security for employees.
This post originally appeared in Fast Company.