Wednesday, February 13, 2008

How Bad Will Employment Get? pt. II

From the WSJ:

The current weakening of the labor market reflects a slowdown in hiring -- not the mass layoffs that have characterized past economic downturns.

The Labor Department said there were 1.8 million layoffs in December, about the same number as in December 2006 -- despite the mounting turmoil in the meantime in the housing, mortgage and finance markets.

Andrew Tilton, senior economist at Goldman Sachs Group, said the absence of large-scale layoffs partly reflects companies' uncertainty about the economic environment and their determination, at least for now, to hang on to their skilled workers.

"It's really in finance and housing -- and to some extent retail -- where the pain is being felt most clearly," he said. "Many other sectors aren't feeling pressure [yet] to lay off workers [and] are hesitant to let them go if they'll need them back soon," should the economy recover, Mr. Tilton said.

In the first article on this idea I put forward the following thesis.

1.) Overall job growth during this expansion has been incredibly weak.

2.) Yet productivity growth has been incredibly high.

3.) Putting these two facts together, I put forward the following thesis:

Let me throw the following hypothesis out: employers were far more reluctant to hire this expansion. Instead, they hired less but increased their productivity more. As a result, their business models are now wedded to a higher-productivity/lower workers total model. This means businesses can't cut jobs like they would in previous expansions because they would lose valuable employees. In addition, this would negatively impact the increased productivity of their respective businesses, which would have a ripple effect through their respective business

While I am not sold on this idea yet, it does appear that some economists have come to the conclusion that drops in employment won't be as pronounced during this slowdown as in previous slowdowns.