Why businesses are still hiring furiously, even as a recession looms

Should companies hire or fire? The demand for workers has increased again in the last two years. But labor supply has not kept pace and shortages are widespread. This means many companies need to hire. On the other hand, recession fears are widespread. Some bosses suspect that they already have too many employees. Mark Zuckerberg told Facebook employees that “there are probably a lot of people who shouldn’t be here.” Tim Cook, the head of Apple, takes the middle course. Apple will continue to hire “in areas,” he said recently, but was “clear-eyed” about the risks to the economy.

For the time being, the hirers prevail over the layoffs. Data released on Sept. 2 showed that US employers, excluding farms, added 315,000 workers to payrolls in August. The Jobs Openings and Labor Turnover Survey (jolts), released a few days earlier, found 11.2 million jobs in July. America’s unemployment rate rose from a 50-year low of 3.5% to 3.7%, but only because of a sudden influx of job seekers into the labor market. In other words, there were nearly two job vacancies for every unemployed person in America (see chart 1). The situation in Britain is similar. The Bank of England predicts a prolonged recession. Even so, Britain has near-record levels of vacancies. Businesses in both countries are hiring as if a recession will never come.

To understand these puzzling job trends, keep three important influences in mind. First, there is always a lot of turbulence in the labor market. The foundations of economic theory treat firms as if they were all the same, and the economy is just that “representative firm” capitalized. In fact, companies differ from each other. Some expand, while others shrink—in boom and bust. The businesses that will be forced to lay off workers in any recession are probably not the same ones that are furiously hiring now.

A second factor is what Steven Davis, of the University of Chicago’s Booth School of Business, calls “the great shakeup.” This refers to a post-pandemic shift in employment in response to changes in worker preferences. It explains much of the frenetic activity in the labor market. The third issue is that organizations have limited bandwidth. In principle, a well-run business could recruit strategically throughout the business cycle. Some, like Apple, seem to be doing it. Ryanair piled on staff during the pandemic lull and began hiring aggressively as the economy reopened. Its planes have continued to fly this summer, while rivals have canceled flights. But such companies are exceptions. Most businesses are not that agile.

Start with the perennial labor market turmoil. The change in employment captured by indicators such as monthly non-farm payrolls is a net amount. It is the difference between two measures of flows – between job creation and job destruction by firms, and between workers and leavers at the worker level. These flows are large compared to the change in employment. In July, wages rose by 0.5 million, but about 6.5 million workers took new jobs and 5.9 million left their old jobs.

The shock data captures the rate of worker flows in a single month (see chart 2). During the course of a year, an even greater number of people move from job to job or from non-employment to employment (and back). A rule of thumb is that jobs flow at a slower rate than the flow of workers. (Imagine a hypothetical company with two carpenters and one quitter: workers move, but the net change is one job created). In expansions, the rate of job creation outpaces destruction. In times of recession, job destruction is greater. But the churn is extremely high at all times. Some recruiting firms also lay off companies. Walmart, America’s largest private employer, recently confirmed that about 200 jobs will be created at its headquarters. But the retailer said it was also creating some new roles.

While overall jobs are being created, not all businesses are hiring furiously. For some businesses a cyclical recession forces a reassessment of staffing. Planned layoffs at companies like Shopify, Netflix or Robinhood are a correction to previous periods of rapid hiring. For other businesses, layoffs are a response to deeper structural challenges. In February, Ford boss Jim Farley was blunt about his company’s challenges: “We have too many people. we have too many investments. we have too much complexity.” In manufacturing, the need to cut jobs always means people are laid off. But there are industries, notably retail, where the normal turnover rate is so high that jobs can be cut without layoffs. Just stop hiring and payrolls will shrink.

This leads to the second big hiring issue: the big shakeup. A recent study by Eliza Forsythe, of the University of Illinois, and three co-authors depicts a labor market in which the demand side hasn’t changed much since the pandemic. Many of the 20 million American workers laid off in April 2020 were quickly recalled by their employers. But the supply side changed more radically. The number of working adults as a percentage of all adults—the ratio of employment to population—remains below its pre-pandemic peak. Much of this is due to older workers retiring from the workforce, the authors say. Another consequence of the pandemic has been the scramble to fill customer-facing jobs. Vacancy growth is particularly strong in the leisure, hospitality and personal care industries.

It’s about the same in Britain. On a warm weekday in August, dozens of businesses set up shop on the Middlesex University campus in Barnet, a London borough. These companies seek to fill many job vacancies. The target candidates are not graduates, but the local unemployed. Among the companies is JH Kenyon, a funeral director. Metroline, bus company. and Equita, a debt collection company. Many recruiters say applicants used to go to them — a “steady pipeline,” says one bencher. But now the companies have to go out and rip them off.

Employers in America are also stepping up their hiring intensity. Skill requirements in advertisements for customer-facing jobs have been relaxed. The pay has increased more than in other types of work. Ms. Forsythe and her colleagues find an increased likelihood of unemployed and low-skilled workers moving between jobs. Opportunities on the higher rungs of the job ladder appear to have opened up due to retirements.

The third major influence on hiring trends is organizational ability. The huge cross-currents in the economy are taxing the capabilities of businesses. Apple sells discretionary products. It has to watch the cycle, because in times of recession people will delay upgrading their Mac or iPhone. However, for many companies, even the certainty of a recession in 12 months would not be enough knowledge to help them improve their recruitment strategy. They should be aware of the size, duration and industry characteristics of any downturn, not just its occurrence and timing. Turning recruitment on and off in response to subtle cyclical changes is not feasible for many companies. Bosses must ensure that the entire organization is aligned with the goals. Companies, like people, have limited bandwidth.

And recession fears are probably not the main influence on hiring strategy just now. For many employers, Mr. Davis says, the key decision is whether and how to accommodate employees’ desire to work from home. There is a range of answers. At one extreme is Elon Musk, who has harshly demanded that Tesla employees show up to the office for at least 40 hours a week or “pretend to work somewhere else.” At the other extreme are Yelp, a popular review site, which favors a “remote first” strategy, and Spotify, which has a “work from anywhere” policy. This approach has advantages in a tight labor market. A business can cast its recruitment net over a wider area. And there are signs that remote workers will trade more flexibility for lower pay. But there are also obvious disadvantages. It is difficult to maintain corporate culture or unity of purpose when colleagues are barely meeting.

For some kinds of businesses, the cycle will eventually bite. Much of the historical cyclicality in hiring has been driven by high-growth startups and new businesses, says John Haltiwanger of the University of Maryland. In boom times, capital providers—whether venture capital funds, banks, or public market investors—are willing to finance all kinds of businesses. But in times of recession, investors are risk averse. And new businesses without a long history find it difficult to finance their growth. Hiring throughout the economy then suffers.

It’s natural to think that your company is recession-proof and that your competitors will suffer. The archetypal “man in a van”, specializing in renovations, will struggle in the coming year, a recruiter tells job fair Barnet. The biggest construction companies involved in major infrastructure projects like his have a range of projects. But with workers so scarce, he is as clear as Mr Cook about what is possible. “You just have to be able to show up on time and show some willingness and commitment,” he says of his target applicant. “No previous experience required.”

© 2022 The Economist Newspaper Limited. All rights reserved.

From The Economist, published by permission. Original content at https://www.economist.com/business/2022/09/04/why-businesses-are-still-furiously-hiring-even-as-a-downturn-looms

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