Why businesses are still furiously hiring even as a downturn looms

on Sep5
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Should companies be hiring or firing? Demand for workers has roared back over the past two years so many firms need to hire. Yet at the same time fears of recession are widespread. Across industries firms are scrambling to find the right response—and coming up with different answers. Last week Snap, a social media firm, said it would fire a fifth of its workforce and noted the “difficult macro backdrop”. Mark Zuckerberg is reported to have told employees at Facebook that “there are probably a bunch of people who shouldn’t be here,” but has not announced big layoffs. Tim Cook, the boss of Apple, takes the middle course. Apple will continue to hire “in areas”, he said recently, but he was “clear-eyed” about the risks to the economy.

For now the hirers are trumping the firers. Figures released on September 2nd show that American employers, excluding farms, added 315,000 workers to payrolls in August. The Jobs Openings and Labour Turnover Survey (jolts), released a few days earlier, shows there were 11.2m job openings in July. There were almost two vacancies for every unemployed person (see chart 1). The situation in Britain is similar. The Bank of England forecasts a bitter recession but Britain has a near-record level of vacancies.

Why is that? Behind today’s labour paradox lies three factors. First, high churn in the labour market. Second the post-pandemic shakeup to the labour market. And lastly most businesses, fighting day-to-day battles, have limited bandwidth to deal with the new complexities of the labour market. The few that do may be able to secure a lasting advantage.

Start with high churn. The jobs market is in a state of perennial change. Economic theory treats firms as if they are the same and the economy as if it is a “representative firm” writ large. In reality, firms are very different. Some businesses expand, while others shrink—in booms and in busts. The change in employment captured by indicators such as the monthly non-farm payrolls is a net figure, the difference between job creation and job destruction by enterprises and between joiners and leavers at the level of workers. These flows are large in comparison with the change in employment. In July, payrolls rose by 0.5m, but around 6.4m began new jobs and 5.9m left their old ones.

The jolts data capture the rate of worker flows in a single month (see chart 2). Over the course of a year, an even larger number of people move from job to job or from not working to working (and vice versa). A rule of thumb is that jobs flow at a slower rate than workers flow. In expansions the rate of job creation trumps jobs destruction. In recessions, job destruction is greater. But churn is remarkably high at all times. Some hiring firms are also firing firms. Walmart, the largest private employer in America, confirmed in August that jobs would go at its headquarters even as it was creating some new roles.

For other firms, though, a cyclical downturn is forcing a rethink. Planned layoffs at companies such as Shopify, Netflix and Robinhood are a correction to rapid hiring earlier. A lot of the historical cyclicality in hiring is down to high-growth startups and newish businesses, says John Haltiwanger of the University of Maryland. In booms providers of capital, whether venture-capital funds, banks or public-market investors, are willing to fund all sorts of enterprises. But in downturns, investors become averse to risk.

Lay-offs can also be a response to deeper structural challenges. In February Ford’s boss, Jim Farley, was blunt about those at his firm: “We have too many people; we have too much investment; we have too much complexity”. In manufacturing, the need to cut jobs invariably means people get fired. But there are industries, notably retailing, where the normal rate of turnover is so high that jobs can be cut without any layoffs. Just stop hiring and payrolls will shrink. Mr Zuckerberg’s approach, it seems, is to try and hurry along Facebook’s rate of worker attrition.

What about the second factor, the post-pandemic shift in the jobs market? Steven Davis, of the University of Chicago’s Booth School of Business calls it the “great reshuffling”. The demand side of the jobs market has not been changed much by the pandemic, according to a a recent study by Eliza Forsythe of the University of Illinois, and three co-authors. Many of 20m American workers who were laid off in April 2020 were quickly recalled by their employers. But the supply side was more radically altered. The employment-to-population ratio remains below its pre-pandemic peak. Much of this is down to older workers retiring from the workforce, say the authors. And it is still a struggle to fill customer-facing jobs. The surge in vacancies is especially marked in the leisure, hospitality and personal-care industries.

It is much the same in Britain. On a boiling weekday in August, dozens of businesses set out their stall on the campus of the University of Middlesex. Firms including JH Kenyon, a funeral directors, Metroline, a bus company and Equita, a debt-collection agency, were targeting the local unemployed—not fresh graduates. Many recruiters said job applicants used to come to them—a “constant pipeline”, according to one stallholder. But now firms need to go out and drum up applicants. Employers in America are also stepping up the intensity of recruitment. Skill requirements in adverts for customer-facing jobs have been relaxed. Pay has picked up more sharply than in other kinds of work. Ms Forsythe and her colleagues find an increased likelihood of unemployed and low-skilled workers moving into white-collar jobs. Opportunities on the higher rungs of the jobs ladder appear to have opened up, because of retirements.

The combination of a looming recession, high churn and the shifts in the supply of workers is exceptionally complex to manage for most firms. In principle, a well-run business could recruit strategically across the business cycle. But for a lot of firms even the certainty of a recession in 12 months’ time would not be enough to help them fine-tune their recruitment strategy. They would need to know the magnitude, duration and industry characteristics of any recession. Turning on and off hiring in response to subtle cyclical shifts is beyond what is feasible. Firms, like people, have limited bandwidth. What bandwidth there is being expended on navigating working-from-home policies. At one extreme is Elon Musk, who has demanded that Tesla’s employees turn up in the office for at least 40 hours a week or “pretend to work somewhere else.” At the other are Yelp, a review website, which favours a “remote-first” strategy, and Spotify, which has a “work from anywhere” policy. This approach has advantages in a tight jobs market. A firm can cast its recruitment net over a wider area. Remote workers may trade off greater flexibility for lower pay. But there are obvious downsides, too. It is tough to sustain unity of purpose when colleagues barely meet each other.

Can any firms navigate today’s tricky labour market well? Apple appears to be doing so. In Europe Ryanair, an airline, hoarded staff during the pandemic and began hiring aggressively as the economy reopened. It has kept flying this summer, gaining market share as rivals have cancelled flights. But for many firms finding an answer to the labour paradox will not be easy. One recruiter at the jobs fair in Britain with a pipeline of infrastructure projects says he hopes it will be unscathed by recession. Still when it comes to hiring workers in the here and now it is a scramble, “you just need to be able to turn up on time and show some willingness and commitment,” he says of his target applicant. “No previous experience is required.”

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