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What does inflation mean for consulting wages?

By Katherine Gustafson

Recent data shows that inflation is at its highest level since 1982. And the labor market is hot, with 1.8 job openings for every worker actively looking for a job. These changes have boosted wages in recent months in industries across the economy.

Most of the conversation about labor shortages and wage growth has related to full-time workers and wages. As a firm that companies turn to for contract-based help from consultants, we wondered: Are consulting rates also increasing as a result of inflationary pressures?

Based on our experience placing hundreds of consultants on projects over the last couple years, the answer is no. The fact is that many companies turn to contract workers to save money, as they can hire contractors for discrete projects instead of full-time hours and don’t need to provide costly benefits. With wage pressure going up, some businesses are looking for even bigger savings in their consulting contracts to even out their labor costs.

“Full-time marketing salaries are going up, and in cases where talent is short, they are over-paying,” says EM Marketing founder Ken Chen. “Many companies, however, think that consulting or contracting talent can be got for bargain pricing.”

This push for bargain consulting contracts has also been accelerated by the pandemic, as a widespread shift to remote work revealed to companies the ease with which they can hire workers anywhere in the world in non-traditional arrangements — what Harvard Business Review calls “flexible and open talent.”

This shift toward using freelancing, consulting, or contract workers is bigger than the current talent shortage, and in fact may be contributing to the shortage of full-time talent as workers rethink which employment structure provides them the most flexibility and autonomy. With so many workers — including highly skilled and experienced professionals all around the world —seeking out contract work, companies see a surfeit of talent in that area and expect pricing to reflect this level of competition.

“There’s a trend to go down in wages based on a pressure to do it faster and cheaper, which is very prevalent in Silicon Valley because they now see they can hire people in areas that are lower-cost-of-living,” says Chen.

In some cases, companies may be able to hire the caliber of contractor they need on a cut-rate contract, but many find that the more consultants there are vying for attention in the market, the more assertive they need to be about attracting the best talent. This means that companies may increasingly see that higher rates are necessary to make consultants a successful element of their teams.

“Managers should recognize that increases in the willingness to use open talent will mean competition with the best firms for the best talent,” note Adam Ozimek, chief economist at freelance marketplace Upwork, and Christopher Stanton, professor of business administration at Harvard Business School. “In a globalized, online economy, Western firms won’t just compete with local Indian firms for the best Indian talent, but instead with anyone willing to pay for digital work.”

With the combination of a shortage of full-time talent, rising wages for full-time workers, a newfound openness to hiring remote contract workers, and increasing competition globally for consulting talent, it’s very possible that the established trend of companies looking for bargain contract terms will soon begin to shift.

“In my opinion, companies have to adjust,” says Chen. “I’m hoping we see an upward trend shortly, and I cannot see how that doesn’t happen if inflation keeps going up and a talent shortage still exists.”

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About Katherine Gustafson

Katie Gustafson is a freelance writer based in Portland, Oregon, focusing on content writing for business, tech, finance, and nonprofits.

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