The K-Shaped Labor Market: What it Means for Retention in the Service-Sector
The U.S. economy continues to show, often surprising, signs of resilience, with GDP growth and consumer spending holding steady. But for customer-facing industries—healthcare, hospitality, and retail—this recovery is anything but even. The current K-shaped labor market means some sectors and workers are thriving, while others face persistent challenges. For service-sector leaders, this is a call to rethink how they attract, engage, and retain talent. Let's start with a quick look at retention and turnover in 2025.
July 2025 Red Flags by the Numbers
- Overall unemployment rate: 4.2% — stable but slightly higher than 2018.
- Youth unemployment (ages 16–24): 10.8% — up from 9.8% in 2024, signaling a tougher job market for young workers.
- Youth employment-population ratio: 53.1% — down from 54.5% a year earlier.
- Part-time employment for economic reasons: 4.7 million — unchanged from previous months, but elevated compared to pre-pandemic levels.
Growing Demand in Service Industries
- Healthcare: +55,000 jobs added in July alone, with strong growth in ambulatory care and hospitals.
- Retail: +15,700 jobs, led by general merchandise and health/personal care stores.
- Foodservice: 1.0% real growth expected in 2025, with quick-service and casual dining leading the way.
What This Means for Leaders
The numbers can seem dull, but they paint a clear picture: the talent pipeline is narrowing, especially for entry-level and frontline roles. Unemployment is still low and the service-driven economy is growing. With youth unemployment rising and greater engagement in part-time work, traditional recruitment strategies may no longer suffice. Employers must:
- Invest in candidate experience: Transparency, speed, and personalization matter more than ever.
- Offer flexibility and purpose: Workers are choosing roles that align with their values, needs, future goals.
- Focus on competencies and skills: Maximize skills-based hiring and internal mobility to grow talent and make use of hidden skills and talent.
Takeaway for Retention
In a labor market shaped by divergence (think the top and bottom of the 'K'), we have to think in new ways about talent. The path forward isn’t just about filling roles: it’s about creating employment experiences that earn trust and commitment. How can organizations build intentions to stay, grow, and develop with their workforce?
What if we turned our focus away from turnover to retention?
As the numbers show, unemployment is low. There usually aren't a shortage of customer-facing positions. If a person wants a job in healthcare, hospitality, or retail, they can get one; making the effective unemployment rate lower than what's reported. To stay fully staffed, it’s time to panic — or, better — switch the focus from turnover to retention. For our discussion it might be helpful to visualize water in a bucket, something like this:
The Employee Bucket has Holes in it!
Imagine your employees are the water in the bucket. The flowing faucet represents hiring, while the holes in the bucket represent turnover. To the extent that your employee losses exceed your additions, you struggle. Teams are short-staffed and unable to meet customer expectations. We risk even more turnover as teams are strained and the employee experience suffers. For a service-driven company, this situation is damaging as customers and frustrated employees abandon your company for greener pastures.
But what if we turn up faucet? If we can increase the flow a bit more and hire more employees we can compensate for the holes — and make up for any of the difference in customer loyalty through discounting.
What is Going On?
Turning up the faucet is a turnover focused strategy.
Our team's wondered for many years why it is that the leaders of service companies tolerate high employee turnover. It has never made sense; especially, if you recognize that employees are the faces, hearts, and hands of your brand. Our conclusion is as simple as that picture of a bucket: leaders are looking at the wrong end.
Instead of keeping the bucket full by intentionally building employee retention, we fall into the trap of filling it through recruitment. This is the wrong approach. It's particularly damaging during a time of economic uncertainty, labor market competition from all sides, and a narrower talent pool. It's short-sighted in any economic situation.
Industries like retail, restaurants, and even healthcare unfortunately fall into taking the "fill the bucket” approach. They are focused on turnover and recruiting faster than employees leave. This replacement approach to turnover no longer works, if it ever did. Recruiting is expensive because new employees are expensive – you have to find (think recruiting costs, like maintaining evergreen job ads), train, and grow them into their jobs.
On top of that, it’s often the best employees who leave a lackluster employee experience as they can easily find another job. Further, if there are no stable employees – those who stay and know your customers and business – there can be no regular customers and repeat business.
The turnover focused approach is about quantity based on the twin assumptions that there is an endless supply of labor and that any candidate is pretty much like any other in terms of their potential.
Building a Remarkable Employee Experience and Focusing on Retention
There is another way to approach the problem that starts with recognizing the fact that the only way to earn the loyalty of your customer is to be fully staffed with fully trained and capable employees.
This is the retention approach and gives us a stable and lasting solution. We're fixing the holes. In some cases may feel like we're building a new bucket from scratch. An advantage is that we're positioned to improve upon the solutions we create. How much are reducing our losses? If a fix, like compensation, doesn't last as expected we can build something different. This approach comes from knowing that employees aren't exchangeable. They aren't like the water in our bucket analogy. High performing employees are worth creating a noteworthy and remarkable experience for that supports their success.
Unsplash+ In collaboration with Getty Images
Hiring for Retention
The first step is the hardest step of all: commit to earning the loyalty of your employees.
That’s a serious commitment. What if you thought of employees as volunteers in your company's success? What they volunteer is their enthusiasm, hard work, and commitment. These qualities are difficult to buy.
Now, if you were to imagine recruiting volunteers to run your business, what kind of experience and rewards could you promise them? How would the day-to-day experience be different from what it is now? Now, flipping back to reality, are there elements of that volunteer experience that merit becoming part of your intended employee experience?
Companies think about the customer experience all the time. Consider what this volunteer thought experiment could do for your employees – and ability to earn their loyalty and retain them.
Stay Interviews and Building the Path to Retention
Next comes the work of discovery. This is where you get your arms around the scope, causes, and consequences of your turnover (leaving) and retention (staying!) by job. This is the detective work required to identify good answers to the following questions:
- Why are people leaving?
- Who is leaving? Are exits centered around specific milestones in tenure? Do reasons differ by position or other individual differences?
- Are there any best practices in our industry for retaining employees we can learn from?
- What’s the potential return on investing in employee retention (so we can build our case for any investment)?
Once you have a handle on these questions you'll have an evidence-based perspective to build solutions. Often, there is the proverbial 'low hanging fruit' you can capture early for easy wins.
For example, one of our clients discovered that their employee onboarding and orientation processes were contributing to a massive first month turnover, or churn, exceeding 100 percent. After looking at the reasons for this staggering statistic they improved the hiring process to better educate candidates about job demands and moved to group-focused training in order to more quickly create a sense of belonging among new hires, while more efficiently getting new hires up to speed. For more on how to make that happen take a look at our quick video on realistic job previews, below.
After a few months, 30-day churn dropped by more than half – with turnover continuing to decline as the onboarding and training process improves.
Being fully staffed and fully trained (FSFT, because everything is better with an accompanying acronym) elevates employee retention to the status of being a business imperative. It's vital to your company’s survival. Unfortunately, many leaders jump to tactical solutions when faced with challenges to an imperative such as FSFT.
It's tempting to look for a quick fix – sometimes we find the results we're seeking, but often not. We recommend walking before you run. Determine and focus on your purpose: being a remarkable place to work, the best place to work for your people.
When you address questions such as what you want your employees to think, say, feel, and do while working for your company, you have taken a significant step toward building employee retention. You've created a target to which you can focus effort, attention, and resources. We want to help you answer questions such as these on the way to being the best place to work and a remarkable organization. None of that can happen without the first few moments, days, and weeks on the job. What is your employee experience truly like? The first month? When you have a clear picture build an experience they want to continue to be a part of for the days and weeks to come.
