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The Great Resignation – a turning point?

The COVID-19 pandemic is the newest addition to the list of pandemics through history, the last one being the 1918 H1N1 Spanish influenza (flu) pandemic. While the common denominator between them remains the outbreak of a certain disease across population, there are some economic aspects that should also be taken into consideration.



COVID-19 did not only arrive with regrettable medical and psychological repercussions. Amid uncertainty, one consequence that analysts and economists had not exactly foreseen is the Great Resignation. While the focus was on what was happening during the pandemic: shifts of the stock markets[1], rise of unemployment[2], lack of vacancies, recession[3] and decrease of tourism, a whole phenomenon made its apparition in the background of the world scene. This phenomenon would end up disrupting the entire established work life dynamic the society had framed as a reference up until now.


But first, what is the Great Resignation?


The naming comes from Anthony Klotz, a psychologist and professor at Texas A&M. He first introduced this terminology in May 2021[4] and it refers to people leaving their jobs (4 million in July 2021, in the United States[5], see Figure 1) by changing employers, switching careers or simply taking time off work for a while. He elaborated this theory based on four observed trends:


1. Backlog of resignations from 2020. Indeed, as employees were reluctant to switch jobs in the midst of a pandemic, those who were planning to do it in 2020 waited until 2021 instead.


2. Burnout, which is a predictor of turnover.


3. Shift in identity, as people took the time to reassess their priorities and their desires.


Reluctancy towards returning to work, fueled by fear of contracting the virus, uncertainty and lack of alternatives for children daycare.


While the name already suggests what it means, the subtilities behind the phenomenon are quite surprising, its novelty being linked to people leaving their jobs without especially having a plan. Also, options for the employees are starting to broaden up, meaning that even satisfied employees consider making the switch.


Reasons of the Great Resignation


This desire to resign, even without having a safety net, must be based upon valid reasons. What are they?

The repeated motives in the media outlets are referring to burn out, a demand of better working conditions in general and of higher wages. But is it really that straight forward? Let’s take a deeper dive into these reasons, back them up by data and see how they apply to today’s society. There are three categories that we will tackle in this article:


a) Well-being at work


On average, US adults spend more than half of their life working[6]. Therefore, it’s fundamental for their mental health to have a healthy work environment, a purpose, a connection to their colleagues, but also the time to invest in their hobbies and interests. This goal is to be pursued both by the employee, for obvious reasons, but also for the employer, as studies show that healthy and happy employees are also more productive[7]. However, how much of the ideal situation is reflected in reality?


The chart below, which resumes a study led by Limeade[8] analyzing the motives of resignation during the Great Resignation, shows that burnout is leading by far, being the main reason of resignation. It’s followed by company going through organizational changes, however without giving more details about what that might include. The next following causes all occupy the third place: lack of flexibility, instances of discrimination and employees not having their ideas valued. On the last two spots, we find insufficient benefits and well-being not supported by the company.


a) Shift in the labor market


The second argument is a return to the basic economics law of supply and demand. Liz Elting wrote an article for the Forbes[9] stating that this phenomenon has a simple explanation: there are more positions open (demand for labor) than candidates (supply of labor), which means that the price (wages) increases. This is of course a simplification, but it’s worth analyzing how it is reflected in the labor market.


But how did we get here? First, an assessment of the situation during and after lockdown is needed.


During Lockdown, knowing that


- D1 = demand of labor in t1[10] and D2 = demand of labor in t2[11]

- Q1 = quantity of labor in t1 and Q2 = quantity of labor in t2

- P1 = price of labor in t1 and P2 = price of labor in t2



Figure 3 shows how during lockdown, the demand for labor decreased, going from D1 to D2, due to companies laying off employees, therefore moving the new equilibrium wage (price) lower than before, going from P1 toP2.


After lockdown, however, when the restaurants, bars, theaters etc. started to reopen, a surge in the demand for entertainment, goods and services was observed. This was reflected in a lack of resources on the providers side, as they had just laid off part of their workers. Having to find the resources in a short amount of time to satisfy the consumers increasing demand, they went on a hiring spree. Normally, in a perfect economic environment, the following phenomenon would have surged:


Expected situation after lockdown, knowing that :


- D3 = demand of labor in t3[12]

- Q3 = quantity of labor in t3

- P3 = price of labor in t3



Figure 4 shows that therefore, as a consequence of the hiring spree (demand going from D2 to D3), wages should have increased (P3), as well as quantities of labor (Q3). However, in reality, it is not exactly what was observed. Workers were afraid of uncertainty, there was still hesitancy about the virus, and people were not that eager to return to work. Which means that quantity of labor didn’t raise as much as expected, and the ones that actually wanted to return to work gained even more leverage over the employers. They realized that since employers needed them that badly, they were worth more.


Observed situation after lockdown, knowing that:


- D4 = demand of labor in t4[13]

- Q4 = quantity of labor in t4

- P4 = price of labor in t4



Figure 5 shows that quantities of labor (people employed) did increase, from Q2 to Q4, but not enough to return to the pre-pandemic scenario (Q1). This led the price (wages) to rise from P2 to P4, so even more than what was expected. This was actually observed in reality, as wages grew more for job switchers, compared to those who kept their jobs[14]. This is of course true in general, as it is proven that job switchers increase their wages significatively more than job stayers[15]. However, the gap between job switchers and job stayers widened between April 2021 (3.6% wage increase for job switchers and 3.1% wage increase for job stayers) and November 2021 (5.2% wage increase for job switchers and 3.8% wage increase for job stayers)[16].


a) Own boss


The third possible cause would be people quitting their jobs to become entrepreneurs. Since the 2008 financial crisis, a record number of self-employed workers in the USA was observed, amounting to 9.44 million[17]. Compared to pre-pandemic, this translates to an increase of 6%. Upwork reported that 20% of people working from home were considering leaving their jobs to become self-employed. However, it’s plausible that this trend of self-employment deflates in the long run, as it is also based upon a rise in savings, which was in part a consequence of unemployment benefits. Once these savings dissolve, a return to work might be conceivable.


How is Europe affected?


While this phenomenon started in the USA, Europe did not remain unaffected. Similarities between Europe’s and USA’s scenarios were observed. First, a surge in unemployment rates going from 6.3% in March 2020 to 7.7% in September 2020[18] was observed. However, since then, they went back to pre-pandemic levels. Then, a record number of young employees started quitting their jobs, leading to countries as Germany to experience more than a third of companies lacking skilled workers[19]. Moreover, a report from YPulse[20] conducted between August 2020 and August 2021 shows that 20% of Millennials in Western Europe quit their jobs in the past year, for the following reasons:


While in the USA the main reason had to do with mental health and burnout, in Europe it mostly revolves around money (20%), closely followed by mental health concerns (19%).


In addition to these findings, the OECD has also found that in its 38 member countries, there is a decrease of people in work before and after the pandemic, 20 million fewer people to be specific. Out of these, 14 million are not looking to find work elsewhere.


How is consulting industry affected?


A survey from Source Global Research states that 2-in-3 consulting firms say they’re short-staffed, which leads 1-in-5 of them to turn down work as a result. In addition of difficult recruiting, retention has also become a problem, compared to last year. Profit maximization as advertised in Economics textbooks is becoming a goal impossible to achieve, not because of lack of projects, but because of the lack of resources to assign on these projects. This shortage of capabilities can be partly explained by quality consultants quitting the industry during the pandemic, as it doesn’t appear that attractive anymore. Without all the benefits linked to travelling, expensive hotels and luxury lifestyle, consultants started to do more introspection and turn to meaningful projects, as well as companies with socially conscious values.


The question then prevails: is there a lesson to be learned in consulting from these findings? It could be concluded that attractiveness in consulting should rely more on projects with meaning, a healthy work environment and less on superficial advantages, that are not sustainable when the world and the economic environment goes through a disruption. Moreover, a shift in the traditional business model is nearly indispensable as times have changed and the work environment is lagging. The business model that previously relyed on talented young graduates willing to work uncompensated extra hours solely for the consulting holy grail – experience – is outdated. People are not afraid to be wanting it all anymore: meaning in their work, interesting projects and correct compensation package.

Valentina Constantin

Consultant

[1] The FTSE dropped by 14.3% in 2020

[2] In the USA: 8.9% people were out of work in 2020 (IMF)

[3] The IMF estimates that the global economy shrunk by 4.4% in 2020

[4] Kaplan, Juliana. "The psychologist who coined the phrase 'Great Resignation' reveals how he saw it coming and where he sees it going. 'Who we are as an employee and as a worker is very central to who we are.'". Business Insider. Retrieved 2021-12-01.

[5]U.S. Bureau of Labor Statistics

[6] US Department of Labor, Bureau of Labor Statistics . Average hours per day spent in selected activities on days worked by employment status and sex. 2018.

[7] Institute for Health and Productivity Studies, Johns Hopkins Bloomberg School of Public Health . From evidence to practice: workplace wellness that works. 2015.

[8] https://www.limeade.com/resources/resource-center/limeade-employee-care-report-the-great-resignation-update/?utm_source=newswire&utm_medium=press_release

[9] https://www.forbes.com/sites/lizelting/2021/11/11/the-incredibly-simple-reason-behind-the-great-resignation/

[10] Before lockdown

[11] During lockdown

[12] After lockdown, theoretically

[13] After lockdown, observed

[14] U.S Department of Commerce

[15] https://www.cnbc.com/2018/09/07/job-hopping-in-tight-labor-market-can-help-you-snare-a-fatter-paycheck.html

[16] Bureau of Labor Statistics

[17]US Labor Department

[18] Eurostat

[19] Ifo Institute - https://www.ifo.de/en/node/64602

[20] https://www.ypulse.com/article/2021/11/02/why-the-great-resignation-is-happening-in-western-europe-too/


Credits


https://www.ypulse.com/article/2021/11/02/why-the-great-resignation-is-happening-in-western-europe-too/


https://www.washingtonpost.com/world/2021/10/18/labor-great-resignation-global/


https://hbr.org/2021/09/who-is-driving-the-great-resignation


https://www.wired.co.uk/article/great-resignation-quit-job


https://theconversation.com/the-great-resignation-is-a-trend-that-began-before-the-pandemic-and-bosses-need-to-get-used-to-it-170197


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https://www.forbes.com/sites/lizelting/2021/11/11/the-incredibly-simple-reason-behind-the-great-resignation/


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https://www.wsj.com/articles/workers-quit-jobs-in-droves-to-become-their-own-bosses-11638199199


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