Having a hard time hiring? Some top economists say “labor hoarding” could be adding to your challenge. Instead of laying off workers during uncertain economic times, businesses hang onto them. Why?
Jason Furman, former chair of the White House Council of Economic Advisors under President Barack Obama, KPMG chief economist Diane Swonk and others note this trend in a recent article in Inc. Companies choose to ride out the uncertain economy by keeping higher payrolls. The idea is they want to avoid the long-term costs of hiring and training new employees when the economy rebounds.
The idea of “hoarding” labor marks a shift in the go-to strategy that business owners typically take in a recession: reduce your labor force to preserve profits in the short term.
Julia Pollak, chief economist of ZipRecruiter, said that as the cost of losing people because of layoffs and firings has grown, layoffs and firings are declining. “Labor market dynamics have fundamentally changed: time-to-hire, recruiting costs, and hiring costs have all grown substantially.”
Layoffs may be low, but employees are still quitting at a high rate. So, businesses already have more vacancies than they want, she noted. Hiring processes are struggling to keep up.
It’s no wonder you may be having a tough time hiring. There are about two job openings for every person looking for a job. Surveys by the U.S. Bureau of Labor Statistics show no real upward trend in layoffs, which is one factor that contributes to the labor supply. July was the 16th straight month of layoff rates below pre-pandemic levels.
Dr. Julia Coronado is an economist for Macro Policy Perspectives. She pointed to companies’ recent experiences of having to work unusually hard to hire new team members on top of the difficulty created by the Great Resignation on the labor front. This is having an effect – companies are reluctant to pull the trigger on layoffs.
“It has been such a tough road to staffing up, and turnover is still high, so firms are reluctant to freeze hiring and plan to use any slowdown to acquire or hold onto top talent,” said Coronado.
Businesses rarely perform a thorough calculation of costs and benefits related to retaining or laying off employees. They tend to keep track of retention percentages and similar statistics. However, they usually do not model these labor-side factors in the same way that they do with their customers, where the ratio of customer acquisition costs to their long-term value is a cornerstone of financial analysis.
“It’s not just retention,” said Pollak. “It’s retention plus morale, plus productivity.” She suggested that companies estimate how long it takes to become productive in a role, and use that as a key component in calculating the long-term costs of a layoff.
Labor hoarding is not new. It has been relatively popular in economic literature at a few points in the 20th century, although references to it dipped sharply after the late 1990s. But it appears to be making a comeback as some companies don’t want to be left desperately searching for help if the economy rebounds quickly.
Is it right for your business? That depends, but it’s certainly worth considering the long-term implications of your decisions – the idea that layoffs come with real and somewhat calculable costs.
