US businesses hoarding workers despite cooling economy.
US businesses hoarding workers despite cooling economy.
The Strategy of Labor Hoarding: Weathering the Storms of an Uncertain Economy
Image Source: Reuters
When storms battered California’s farms last winter, Kevin Kelly, CEO of Emerald Packaging, faced a tough decision. Normally, he would have trimmed his workforce by 10% to adapt to the plummeting demand for plastic bags used for pre-cut salads and other produce. However, after struggling to find and train workers during the COVID-19 pandemic boom, he decided against layoffs. “I knew it would be hard to find people when business came back, let alone train them,” said Kelly. Instead, he found innovative ways to reduce his employees’ hours, including cutting down on overtime.
Kelly’s approach reflects a growing trend among employers across the United States. Faced with the tightest job market in decades, companies are less inclined to resort to layoffs, even in a cooling economy. This shift in strategy, often referred to as labor hoarding, was driven by difficulties in finding and retaining skilled workers during the pandemic-induced boom. The fear of not being able to hire and train workers quickly when conditions improve has led many businesses to hold onto their existing workforce.
This strategy is being put to the test amidst predictions of an impending deep recession. As the Federal Reserve embarked on an aggressive campaign to raise interest rates last year, concerns about high inflation and its potential impact on the economy grew. However, despite a sluggish growth rate, the U.S. job market has remained resilient. As of June, the jobless rate stood at 3.6%, only slightly higher than the record-low 3.4% earlier in the year.
At least one major company, Norfolk Southern, has adopted a formal labor hoarding strategy. CEO Alan H. Shaw explained that by avoiding the cycle of furloughs and rehires during economic downturns, the railroad company aims to become more competitive with the trucking industry. Shaw emphasized the importance of maintaining a skilled workforce, even as rail volumes have decreased after the pandemic boom. “We’re continuing to hire because we have confidence in the U.S. economy and the U.S. consumer,” said Shaw.
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While many businesses are not hiring at the same rapid pace as a year ago, they are also not rushing to downsize their workforce. The Job Openings and Labor Turnover Survey, released by the Labor Department, revealed that U.S. job openings have fallen to their lowest levels in over two years. However, the number of layoffs and involuntary separations has reached a six-month low. Despite preparing for a potential downturn, business leaders are still engaged in a fierce battle for workers. The Conference Board’s recent survey of CEO confidence found that 40% of CEOs plan to increase hiring in the next 12 months, with an additional 40% intending to maintain their workforce size.
Dana Peterson, the chief economist at the Conference Board, believes that labor hoarding is prevalent in industries facing high demand. Despite the economic uncertainty, many companies are seeking to retain their workforce. The prevailing expectation among CEOs is that the next downturn will be short-lived and less severe. Peterson argues that in such a scenario, holding onto the existing labor force becomes a prudent choice.
Arnold Kamler, CEO of Kent International, learned the hard way about the perils of downsizing too quickly. The company saw insatiable demand for bicycles during the pandemic, but as lockdowns eased, sales plummeted. Kamler went on to lay off 60% of the workers at their South Carolina plant. However, when they attempted to rehire in March, only a third of the workers returned. Now, the company is struggling to find and train new employees. Kamler regrets his decision and wishes to increase the workforce from 85 to 110 employees.
Julia Pollak, chief economist at ZipRecruiter, acknowledges that employers are retaining more workers than they normally would due to concerns about future hiring difficulties. However, she also believes that businesses have their limits, stating, “I don’t think it’s the case that many businesses are holding onto workers who are idle.”
The debate over labor hoarding has shifted as the need for businesses to recapture margins may outweigh the argument for retaining under-utilized staff. Thomas Simons, senior U.S. economist at Jefferies, has long advocated for downsizing as a hedge against the challenges of rehiring in the future. However, the recent decline in weekly new claims for unemployment benefits challenges this perspective. Despite a slight increase in weekly jobless claims, the overall trend supports the idea that labor hoarding may be a viable long-term strategy.
Emerald Packaging stands as a testament to the viability of labor hoarding. Despite experiencing a slowdown due to winter storms, the company has made a remarkable recovery. According to Kevin Kelly, they are currently more profitable than during the booming phase, thanks to the surge in raw material prices. Moreover, the company is still in the process of hiring, as they are currently 15 to 18 employees short.
Image Source: Reuters
The strategy of labor hoarding provides a unique perspective on how employers are adapting to an uncertain economic climate. It reflects a paradigm shift in understanding the value of a stable and skilled workforce, even during challenging times. As companies strive to navigate the storms of economic volatility, the principles of labor hoarding may continue to shape the approach to employment and workforce management in the coming years.
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