Tuesday, October 27, 2009

Two reports on how labor markets are changing

From an employee perspective, not for the better. Although there is evidence that output grew in the third quarter, firms are in no hurry to start hiring again. There are a number of factors behind this: some firms will raise hours per person to economize on training costs and employee benefits; others will emphasize increased efficiency; many have concerns about the duration and strength of the upturn; and no small number are worried about the potential outcomes in Congress with respect to health insurance regulation (can we stop using the word reform here?) and cap-and-trade. A recent WSJ article reports on how various firms are responding; the good news locally is that Cree is adding 275 positions. The article also has some interesting ideas about service innovation at the Sheraton Maui.

Obama's chief economics advisor Larry Summers developed a theory of long term unemployment called hysteresis back in the days when he was a Harvard economics professor. In a nutshell, this theory says that the longer a person stays out of work, the lower the odds become that he/she will ever work again as skills become outdated and the work ethic deteriorates. Summers used this theory to explain the persistently high unemployment rates observed in most European countries in the 1990s. Could the US be looking at the same situation in the 2010s?

Another recent WSJ article reports on how the recession might have permanent effects on the relationships between employers and workers. We all know about firms (including state government) that have cut health benefits, reduced contributions to retirement plans, and eliminated other benefits such as employee education. Some companies and governments have reduced pay. In economic terms, employers appear to be taking steps to make labor more of a variable cost than a quasi-fixed cost. Hiring caution, benefit cuts, more contingent pay and lower salaries -- as one Unisys engineer was quoted "You've got to take care of yourself."

My take: the answer depends on the overall state of the labor market. If there is a robust recovery, then labor shortages will develop and employers will have to adjust. Remember -- employers instituted health, retirement and education benefits for two reasons: to attract and retain talent and to provide some tax-free compensation. But if the labor market gets a bad case of hysteresis, to paraphrase Bette Davis in All About Eve: "Fasten your seat belts, it's going to be a bumpy ride."

No comments:

Post a Comment