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The disconnect between productivity and hiring

Generally employers hire more employees to boost productivity. There are reasons why, despite dropping productivity numbers, it’s not happening this time around.

Lining up for jobs

The latest recession forced many U.S. companies to cut costs and run leaner businesses. Executives dramatically slashed headcount and even held off on replacing old and aging equipment, software and other capital. The measures generally worked for a while, but the recent unexpected dip in U.S. productivity has begun to cast doubt that companies could go on like that much longer.

After growing last year at an average annual rate of 6.2%, productivity, as measured by output per worker, slowed during the first three months of this year and fell by 1.8% the following quarter ending in June, the U.S. Labor Department reported. The drop, to some economists, signaled that perhaps companies have maxed out their slim line of workers.

The Wall Street Journal reported the drop might finally compel companies to start hiring more. This would be a huge relief as joblessness hovers at nearly 10% and many companies are reluctant to take on more employees even while sitting on record cash balances.

But relative to most other downturns, the scars of this latest recession run deep and it’s no secret that we’re in for a slow recovery. The fall in productivity certainly could prompt companies to hire more, but other economic factors still weigh heavily on the minds of executives deciding whether to take on new hires.

Even for lean companies, there might not be substantial hiring anytime soon because of the many “unknowns” in the economy, says Sean Snaith, economist and director of University of Central Florida’s Institute for Economic Competitiveness. For one, it’s still unclear how much health care reform legislation, which Congress passed earlier this year, could end up costing employers. Also, it remains to be seen what percentage of income will go toward taxes next year.

“When you don’t have all those answers and you don’t have tremendous growth and demand, there just isn’t the urgency to hire more,” he says. “Even if you’re on the cusp of hiring, these unknown factors might be keeping folks from pulling the trigger.”

During the early part of an economic recovery, it’s typical for productivity to rise. Business tends to pick up faster than employers can add workers. And it’s also typical to then see those gains fall some as hiring ramps up.

But the latest drop in productivity was particularly surprising. Economists say it could be read another way: During the second quarter, hours employees worked increased 3.5%, outpacing the rise in output of only 1.6%. This could mean that companies earlier this year hired more workers on the expectation that GDP would continue to rise, but the economy has slowed since the first quarter as stimulus spending fades. If that’s the case, the fall in productivity is more worrying news for job seekers.

Executives probably won’t ramp up hiring significantly unless the economy continues to grow. “Companies can get away with pausing because the pace of the recovery is pretty slow and demand has been pretty weak,” says Snaith.

See also:

Corporate cash hoarding isn’t sustainable

Recession officially ended in June 2009

Greenspan, again: The market will work itself out