Linda Nazareth is a senior fellow at the Macdonald-Laurier Institute. Her book Work Is Not a Place: Our Lives and Our Organizations in the Post-Jobs Economy is now available.
Let’s not say for sure that there is a recession brewing. All those indicators – that inverted yield curve, those depressed purchasing managers, the fancy models signalling dismal things – well maybe they are just wrong. And who knows, maybe you can take a sledge hammer to free(ish) trade amongst countries and go on to have your economy thrive. It could happen, right?
At this point though, it may be realistic to plan for some sort of downturn to hit the United States, Canada and perhaps the global economy by 2020. In advance of that, this might be a good time for businesses to consider what to do about their payroll costs when things slow down. Traditionally, recessions tend to mean printing up the pink slips and slashing head count, but doing that this time around may not be the best idea for anyone.
To be sure, firing people is never the very first thing that happens when the economy loses ground. Rising unemployment tends to be a ‘lagging indicator’ of economic health rather than a leading one, which is why you cannot easily judge economic health by using the unemployment rate. As a recession drags on, job losses do mount: According to Statistics Canada, employment in Canada fell by 1.8 per cent during the Great Recession of 10 years ago, while the United States saw jobs contract by 6 per cent. A study done by the U.S. National Bureau of Economic Research estimates that one in six Americans lost their jobs during that period.
Once layoffs start, they tend to result in a plunge in morale both within the companies where they occur and more broadly across the economy. As people fear that their own jobs are in peril, spending gets even slower and escaping recession even more difficult, meaning that from a macroeconomic perspective, they should certainly be avoided if possible.
But what about from a company perspective? Theoretically, laying off people should result in some kind of lean-and-mean, ready-to-do-battle results but perhaps that is not the case. A 2010 study of company choices during recessions by Ranjay Gulati of Harvard divided companies into those that were ‘preventative’ (which is to say focused on slashing costs early in the recession) and those that were ‘progressive’ (those that focused on cutting costs mainly through ‘operational efficiency’ as opposed to cutting jobs), ultimately finding that it was the latter group (only 23 per cent of whom cut costs, as opposed to 56 per cent of the prevention-focused companies) that fared better at recession’s end.
Layoffs are actually quite expensive to companies anyway. After all, every employee represents an investment in hiring costs and training, which becomes money wasted once that worker is laid off, and then spent again when hiring starts again. Add in the cost of severance (and possible lawsuits in these litigious days) and the costs start to mount. Given the extremely tight labour market now in place in the United States and Canada in many industries, presumably there will be some sober second thought before layoffs happen en masse this time around, with companies being cognizant of how difficult it is to find staff.
So what might be the better path this time around, if that recession does materialize? Freezing pay and bonuses and clamping down on perks and budgets (who needs a fancy holiday party when you can have a potluck in the boardroom, right?) are one way to go but there are others as well. Offering unpaid leave is a possibility, and may appeal to parents who want more time at home or to twentysomethings who want more time to travel – or not, given that everyone wants the income that goes along with work. That said, at least getting days off to go along with a pay cut is better than being told you are keeping the same hours, but you will be paid less anyway (another way to go).
Ideally, the next downturn will result in companies experimenting with things that can save money and ultimately be good for productivity over the long run, thus achieving that ‘operational efficiency’ that will let them come out stronger when the cycle turns up. Saving real estate costs by allowing workers to work virtually could be one way to do this, although it requires taking a leap that many companies have been wont to take by accepting that productivity can happen in many ways besides being in a traditional office. Adopting new technologies is another, although that one comes with the caveat that while that technology may replace some workers, it will ultimately put business in a better place and make it more able to function longer term.
None of the actions that go along with dealing with a recession are ever easy, but at the very least they should be thoughtful. This recession, if it happens, will not stem from the same causes as the previous one or the one before that. Accordingly, perhaps it merits different solutions and ultimately ones that are better for both companies and for the wider economy.
Linda Nazareth