Businesses have reacted to the tumultuous economic conditions in many ways. A logical action has been to reduce cash outlays to a level appropriate to what the new economic conditions seemingly warrant.
Along these lines, expenses have undergone scrutiny and in many cases have been cut, in order to preserve cash as well as improve profitability (or limit losses). Labor costs are notable expenses because of their size.
Many firms have incurred double-digit (percentage) revenue losses over the last few quarters. This can create a rather alarming atmosphere, especially in light of the tremendous overall uncertainty going forward, as discussed in the last post. In this type of fast-moving, uncertain environment where revenues, and losses, can accrue quickly, many businesses have felt they have had to move fast in order to contain potential damage.
Large-scale layoffs have occurred for a number of reasons. Under such uncertain, and unpleasant economic conditions, layoffs represent a quick means by which to bring down total costs and preserve cash. Layoffs have, over the years, become a type of “standard operating procedure” in business, i.e. they are viewed as a rational decision during tough times and are not stigmatized like they may have been a few decades ago. While there are of course many arguments that can be made with regard to the worth of an employee, as well as viewing employees as assets as opposed to expenses, in reality it is very difficult to quantify how one, or a number of, employees’ dismissals will negatively impact a firm in the future. In other words, quantifying an employee’s value is very difficult. However, determining each employee’s total cost is rather straightforward.
Furthermore, there are other factors at play. Employee “turnover” costs are difficult to measure. This refers to how expensive it is for a firm to have high employee turnover, as opposed to low turnover. It is easy to neglect this, and other issues, in difficult economic times.
Another factor that comes into play is executive compensation issues as well as stock market pressures. How are the major executives getting paid and influenced, and how does this directly and indirectly impact hiring and employee costs? Since the highest executives are (likely) getting paid and otherwise motivated to produce profitability, this may well serve as a major influence when viewing employee expense levels. The executive compensation agreements and stock market pressures can create a relatively “short-term” outlook with regard to profitability and a resultant bias against “expenses.”
One also has to wonder as to whether employees are at least partially “bearing the brunt of” poor operating practices that have exacerbated adversity at firms during this period of economic weakness. There are many potential areas within any firm that may be better managed even given the complicated and unpredictable nature of this economic weakness. This “inefficiency” may be compounded should greater economic weakness develop. If a firm is unaware of these “inefficiencies”, it may neglect them, thereby causing greater losses, which in turn produces greater pressure to reduce expenses and therefore employees. These “inefficiencies” may be large, given the complicated nature of our current economic environment. Also, the previously mentioned issue that most firms don’t have operating experience in pronounced economic downturns also plays a role in exacerbating this issue.
As seen by these past five posts, the question “Why Aren’t Companies Hiring?” has a complex answer that encompasses many different factors. Given the severity of the problem, as well as its adverse impact on the economy, the natural question becomes what can be done to encourage, or cause hiring to happen? This question, again, has a very complex answer, especially in light of issues regarding Sustainable Prosperity.
As I started this series of posts with a quote, I will end it with one as well. This quote underscores the severity of the unemployment situation, and is from Mortimer Zuckerman discussing the unemployment levels. It can be found in his recent Wall Street Journal editorial found here:
“The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.”
SPX at 975.15 as this post is written