Working Wounded

Overheard recently: senior staffers of a mid-sized software developer on the West Coast. The names have been changed to protect the innocent.

Jeff, a manager (with great enthusiasm): My staff has really been producing lately -- I mean these guys have been staying late, missing lunch, you name it. And given that we seem to be pulling out of the slump, I'm thinking we should add a new position. After all, my department is at least 10 after the downsizing.

(Others around the table gasp audibly.)

Ross, CEO: Hold on, everyone. Let's hear Jeff out. His folks have been delivering the goods big time since we cut out all that excess fat a few years ago.

Karen, from Legal: Jeff, I can't hide my surprise. Have you really explored all your options?

Ross: Karen's got a point, Jeff. Let's tick down the menu: Offshoring?

Jeff: I'm all for it -- you guys know my department has sent tons of coding work abroad. But we need some new blood to help at the level of architecture, to start thinking about new designs that will put us in a competitive position now that sales are returning.

Max, from Sales: Sales are up a bit, Jeff, but no great shakes. And you're talking about adding a skilled worker, at least a college grad -- surely you realize what kind of money that entails.

Ross: Excellent input, Max. Let's keep going, Jeff. What about temp workers?

Jeff (enthusiasm waning): Like I said, I'm thinking about product development, not help with an ongoing project. That calls for a permanent job where we give someone the time to understand what we're trying to do here.

Nancy, CFO: But Jeff, adding permanent costs right now is just too reckless. We're just turning a profit.

Jeff (getting defensive): Come on, Nancy. Our stock's up 40% since the shakeout.

Nancy (voice raised): Since when has our stock price correlated with our profits? Jeff, I'm hearing some pretty naïve thinking here.

Ross: Hold on, you two. Jeff, I wonder if you've really squeezed all the juice out of your current staff. Sure, they're working hard, but who isn't? A bit more productivity from your team might solve this problem in a way that works best for everyone.

Jeff (finally sensing which way the wind is blowing): I hear you, Ross. And I'm sorry, team. I'm sure my folks can ratchet up their output.

Ross: That's great, Jeff. And thanks for raising an important issue. Now, Nancy, let's hear a bit more about how our stock is doing…

Okay, I made this discussion up, but not from whole cloth. I've made a point of discussing the current hiring culture with every manager I know; believe me, those seeking permission for new hires feel like Oliver asking for another bowl of gruel.

And while it's hard to document beyond the level of anecdote, a case can be made that one of the factors behind what was until recently a jobless recovery -- and is still a slack labor market -- is a shift in the culture of hiring.

Why the cultural shift? The change seems to have been born of a mandate from investors and financial markets: Sure, it's a competitive environment out there, but keep your profit margins up -- way up. (The fact that “Jeff” et al. hold stock options themselves is another motivator.) With inflation quiescent, firms don't have pricing power; given that consumer demand has been stable but not soaring, it's tough to go after market share. That leaves labor as the sole source of cost containment.

Of course, “thou shalt maximize profits” isn't exactly a new commandment. Why should it be sticking now more so than in past business cycles, when firms were more likely to hold onto workers through the rough patch, even if it meant lower profits for a while?

There's no smoking gun here, just a bunch of bullet wounds to the working class. First, there's the fact that the menu of options has expanded over time. Advances in telecom and computing, in tandem with the growth of highly educated workforces in lower-wage countries, have vastly expanded the offshoring option.

Then there are temp hires, the touchstone of cautious employers testing the waters before committing to a permanent job slot. While private sector employment is still down slightly since the recovery began, temp work is up by 10%, a bigger gain than any other major sector.

As noted by my imaginary staff, firms have also resisted hiring by pushing existing staff harder, squeezing out as much productivity as possible.

There's also a relatively new dynamic afoot, one that has emerged over the past decade: applying just-in-time inventory practices to payrolls. Evolving labor market trends have eroded workers' bargaining power, enabling employers to respond more quickly to demand spikes -- both negative and positive -- by laying off or hiring workers as needed, rather than keeping staffs largely intact when demand lags. For workers, it means less job security; for producers, higher productivity and profits.

While you can't quantify cultural shifts, there's strong circumstantial evidence in support of this contention. First, despite a strong showing in March, we remain ensconced in the weakest jobs recovery on record. The big wave of layoffs is behind us, but firms have yet to start hiring in earnest. Second, productivity and profits are soaring while real wage growth remains flat, a sure sign of an imbalance in the distribution of growth.

There's another potential problem here, one obliquely suggested by “Jeff.” It's one thing for a restaurant or retailer to practice just-in-time staffing and quite another for my software development firm. In the latter case, denying Jeff a permanent hire until he's desperate is under-investing in human capital, and it can have the same dampening effect on firm innovation as too little capital investment.

The culture of avoiding hires may have impressive concentrated returns, but the short-term costs are far more widely felt. And in the long run, the costs could be even greater.

Jared Bernstein is a senior economist at the Economic Policy Institute (EPI) in Washington, D.C. He and Lawrence Mishel, the EPI's president, each write a biweekly economics column, "Econ Chamber," for the online edition of The American Prospect. Their column appears here every other Thursday.

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