Tag: labor productivity

Better Management, Less Demand for Labor

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The Bush administration experienced a weak jobs recovery from 2002-2007 and the Obama administration is facing even stronger headwinds in 2009-2010.  Are there structural factors that are more important than the widely discussed business cycle and macroeconomic policy factors?

On the labor supply side, the growth of internet based job applications processes has greatly improved the effective supply of high quality candidates for all positions.  This increases the expectation of firms of finding great fit candidates.  On the other hand, until recently workers had inflexible wage expectations due to worker experience, pride, assets and family income alternatives.  The decline in family housing and investment assets together with the greater experience of long-term unemployment has recently increased the willingness of potential employees to be flexible in seeking work.  Human resources departments remain reluctant to greatly reduce hiring wages in fear of turnover, legal and internal equity challenges. 

Extended unemployment benefits reduce the incentive to find work for some individuals, but this has a relatively minor labor supply impact.

Much greater structural changes have been experienced on the demand side of the equation.   Perhaps most important has been the ongoing growth in labor productivity, which has reduced the effective demand for incremental employment.   Increased staff flexibility in working long hours has also reduced the demand for peak-time or just in case workers

Firms have become more aggressive and experienced in downsizing employee groups as dictated by business conditions, thereby reducing the demand for labor.  This could eventually result in greater future employment demand, since the expected future cost of maintaining partially productive staff is reduced.  It appears that this cost reduction has been offset by a greater awareness that hiring an employee is a long-term investment decision.  Firms that have been trying to rework the employment bargain from one of life-time loyalty to one of “fair dealing” remain very reluctant to plan for future downsizing, so they have set higher new staff addition thresholds, subject to the sensitivity analysis once reserved for major capital investments.

Firms have also become more aware of the all-in cost of hiring.  Health care benefits costs per employee have increased significantly, especially as a percent to wages for hourly and entry-level jobs.   Internet application processes have increased hiring costs for many firms.  The level of firm-specific training required for break-even in many jobs has increased.  With better models of hiring, firms are less willing to hire “good enough” candidates who do not fully meet all functional, industry, character and culture needs, resulting in positions which remain open for longer periods.   Overextended managers have less incentive to add permanent positions.  Firms are also less likely to invest in entry-level professional staff positions due to the higher turnover and lack of investment returns.

Labor force reductions have escalated in the last decade.  Downsizings are conducted when indicated, even in times of plenty.  Marginally productive or engaged staff members are moved up or out sooner.  Employees in obsolete functions see their jobs eliminated.  Protected functions or industries are quite rare today.   In a labor intensive business world, firms are more aggressive in pairing staff.

Productivity improvement projects have become less labor investment intensive.  Much improvement comes from getting more value out of the existing resources.  The declining role of physical capital creates fewer tag along positions.   Firms have learned to manage peak seasons and major projects with less incremental staffing.    Information technology investments had stimulated some new forms of project and analytical staff needs in the last 30 years, but that demand is flat today.  Firms have adopted standard process and project management templates that reduce the demand for new positions to accompany IT investments.

Firms are now fully aware of the use of contractors, part-time staff, consultants, outsourcing and imports to fill most functions.  The need to hold partially employed staff is greatly reduced.  Many processes have been re-engineered specifically to allow outsourced resources to be used to accommodate peak demands.  

Finally, overall business investment has been weak in the post Y2K period.  Firms have learned to manage inventories much better.  They have installed significantly higher project hurdle rates based upon their experience with project failures.   The lower market cost of capital has been a very minor factor outside of industries like real estate and banking.   Through productivity improvements, the effective capital stock has increased without as much new investment.  Sensitivity to the risks of change has caused firms to reduce the number of minor investment projects.

Business investment has been especially weak in the last 3 years, with firms freezing capital expenditures until the overall economic climate is resolved.  This includes fiscal, monetary, trade, tax and regulation policies.  The credit crunch has reduced hiring by small firms.

In general, firms have become much more effective in managing their capital, inventory, technology, brand and labor resources.  Many of these changes in the last decade have reduced the demand for labor.  Some of these changes may have a long-term impact on the minimum or natural unemployment rate, while others will cycle through business profits to business investment to increased labor force demand in the long-run.

Negotiating Work-Life Balance

tomkapostasyLeave a comment

During the Great Recession the balance of influence has shifted markedly towards employers.  Labor productivity increased throughout the two years, in contrast to prior recessions when it declined.  Productivity increased because employers were unwilling to replace departed staff and found ways to motivate the remaining staff to redistribute the work load.  Unless firms were already over-staffed by 5% or suddenly found new ways to identify and eliminate activities, this delegation of work is unsustainable in the long-run.  Far-seeing firms and their best employees have a common interest in helping staff to improve their ability to negotiate a healthy and realistic work-life balance.  Firms which push too hard will eventually experience costly turnover.

Many firms tend to push too hard and then back off as needed.  Determining the breaking point for staff is more art than science.  Employees at every level – hourly, salary, manager, director and VP – have an important obligation to push back constructively.  Especially in the United States, where we have embraced the long-term benefits of free market capitalism without the need for balancing social values or government regulation, every employee has a responsibility to attain the work-life balance that optimizes their happiness.   Wise managers will coach staff in this direction while at the same time asking for more!

Employees need to deliver and focus on long-term value, establish personal goals, delegate, prioritize, evaluate options, negotiate and employ proper tactics.  

Employees need to actively participate in identifying ways to deliver 3-5% productivity improvements each year.  This is the price of admission to the modern labor market.  These short-term and long-term actions deliver the value required for organizational survival.  They outline a program of activities that allows managers and staff to minimize the number of reactive initiatives undertaken.

Employees need to establish their own values, mission and goals.  Without countervailing forces, the need to earn an increasing income will always prevail.  A personal life plan is required to provide a counterbalance to the unlimited requests of firms today.  Staff members need to accept that everyone is replaceable and that some day they will be gone and the firm will move on without them.  They also need to observe that most senior managers have found ways to balance their own personal objectives.  

Staff members need to become world-class delegators, moving work down the hierarchy and to supplier partners.  Individuals who constantly attract and retain new responsibilities will become overwhelmed.

Staff members need to deeply understand that there are an infinite number of goals and an infinite degree of performance that can be requested.  This applies to employees at all levels.  It is an inherent component of the employment relationship.  Employee goals need to be prioritized.  Modern firms understand that they must emphasize product innovation, customer intimacy or operations excellence.  They also know that customers desire varying levels of quality, speed, flexibility, value, information, risk and personal relations.  They know that income statement and balance sheet goals, short-term and long-term measures, financial and operational goals, accrual and cash-flow results all matter but with different priorities.  They understand the trade-offs between risk and reward.  Employees must work with their managers to explicitly prioritize what matters most and to set goals based upon achievable results.

Employees need to negotiate their annual and immediate goals.  The quality revolution has highlighted the need to base goals upon defined capabilities, instead of top-down requirements.  Employees need to master prioritization in setting annual, monthly and daily goals.  Employees, managers and the finance department need to understand that there is an optimal degree of stretch in targets and budgets.  Employees and managers need to understand that there ARE short-term trade-offs between cost, quality, speed, flexibility, risk, relations and brand perceptions.

Employees need to be effective tacticians.  Annual SMART goals need to be realistic.  Staff members need to flex their schedules to meet peak demands and address unexpected events.  They need to recoup this time in slow periods. 

In a challenging environment, every employee needs to understand their role and negotiate achievable objectives that help their firm to thrive.