Thursday, March 11, 2010

Why are companies still cutting jobs?

Although the U.S. economy is clearly recovering from "The Great Recession", companies are still cutting jobs. Why is that? There are a bunch of distinct causes:

  1. There are still plenty of weak companies that formerly thrived on overly-easy and overly-cheap credit. That credit has evaporated and will not be coming back. The weaker companies vanished quite quickly. The stronger companies, especially those with cash in the bank or optimistic investors, have lasted longer. Some of them will successfully restructure and adapt to lower amounts of more-expensive credit. Many will not, but they will try. As their remaining resources gradually drain away, they continue to shed workers. Eventually that process will end, but there was simply a huge amount of that easy and cheap credit over a significant number of years.
  2. Ongoing commercial construction projects shed workers as they near completion, with few new projects to employ those workers, even with all of the federal "stimulus".
  3. State and local governments do not have the federal government's ability to issue vast amounts of debt, so they continue to lay off workers as they struggle to close budget deficits as tax revenues fall short of expectations. They may have held off with many layoffs in the hope that the economic recovery would be stronger or sooner, but the reality of lower tax receipts forces their hand and the pink slips continue to flow and will continue to flow until the private sector starts creating enough new jobs to lead to net growth of tax receipts at the state and local level. Falling home prices will also be a drag on property tax revenues.
  4. Many vendors had been getting a significant portion of their revenues from state, local, and federal governments. Spending cuts (including the federal government) result in layoffs at these vendors.
  5. Productivity improvements. Newer technologies and more-focused management enable companies to deliver the same level of product and service output with fewer employees. So, even as the economy recovers and output increases, that does not necessarily mean an immediate increase in employment. Offshoring of work is a drag on domestic employment as well.
  6. Incremental population growth soaks up "new" jobs with little room for accommodating workers who have lost jobs. Although experience has some value, companies are eager to sign up young, flexible, energetic, healthy, and enthusiastic kids.
  7. Ongoing pressure to improve operating margins force companies to shed workers that they ordinarily might have been seeking to hire. Cost of benefits, including health insurance, is a distinct drag on operating margins.
  8. Intense uncertainty about the near and medium-term economic outlook forces companies to have a more pessimistic attitude towards hiring and firing, resulting in an extreme bias against hiring and keeping workers.

How long before these negative factors end or at least moderate? Actually, these factors will continue for some time, maybe even several years, but the hope is that as the overall economic recovery gains traction, "new" jobs, especially at new companies pursuing and employing new technologies, will gradually be created at a faster pace than the ongoing shedding of "old" jobs.

In the near term, we are seeing weekly unemployment insurance initial claims in the 475,000 range. That is over two million jobs lost every month. Two million. The good news is that recently the net of new minus lost jobs has been less than a net loss of 50,000 jobs, so we actually are seeing quite a few new jobs being created, or at least companies rehiring for positions that they shed over the past two years. Unfortunately, we are also seeing a lot of discouraged workers dropping out of the workforce as they encounter extreme difficulty finding jobs.

To be sure, the U.S. economy is creating lots of new jobs, but the net of creation minus shedding is still not strongly positive and probably will not be for months to come.

-- Jack Krupansky


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