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• Why is Unemployment Stuck at Nine Percent

Why is Unemployment Stuck at Nine Percent

written on February 10, 2011 by Frank Fantozzi

 

When a recession strikes, an unfortunate by-product is that many workers are let go, and not always for economic reasons. A dark undertone plaguing unemployment is that many companies view difficult economic times as an opportunity to let go of marginal performers. This recession is no different.

Companies may have desired to release these employees prior to the onset of a challenging economy but didn’t act for a variety of reasons. When times are good, laying off employees can be a more difficult task. Often, employers don’t want to create a perception among workers or clients that the company is going through a difficult time. Then there are the possible legal ramifications. Will the employer be accused of age-based, gender or another form of discrimination?  And if the company is in the throws of rapid growth, can it afford the transition and training time required to bring a replacement up-to-speed? And what about all the time and training you’ve already invested in this employee?

Prior to today’s recession, unemployment was low, so finding good employees at a reasonable cost was difficult…basic supply and demand. But what about the strong employees that companies were reluctant to let go but had no choice in order to meet payrolls and other obligations in this economy? One of the best times for a company to hire is during a period of high unemployment. There is a good supply of talent at more reasonable costs.

So why aren’t companies hiring?

When times are good, the focus is on growing the business which is more efficient and provides greater financial leverage for the bottom line. Focusing on saving pennies in a growing business economy can only provide so much real return and could prevent companies from seizing strong opportunities for expansion. Few businesses can afford to divert their focus away from the better returns that come at the hands of growth while simultaneously finding ways to cut costs. 

Conversely, in tough economic times, there is no growth and everyone is hoping to just stay afloat. The focus quickly turns to saving money to buoy the bottom line. Companies cut labor costs and look for better ways to be more effective and efficient with fewer people.

Coming out of a recession, many business owners realize they can actually support their business with less staff and, with improved internal processes, can continue to grow for a period of time without hiring. This is why unemployment is one of the last economic indicators to improve as we come out of a recession.

Historically, employment recovery lags financial market recovery by 12-18 months after a recession is signaled to be over. (The opposite is true when we are heading into a recession…unemployment numbers lag a downward trend with business and the economy feeling the hurt first.)

Lastly, during times of rapid technological advancements, companies seize the opportunity to streamline processes and create efficiencies, investing in technology to lessen their dependency on labor. If the business can operate at the same or greater levels of profitability without hiring, then why hire?

My opinion is that we will stagnate in the 9 percent unemployment range until we have true sustained growth: confidence coupled with companies pushing the limits of their capacity. Only then will companies hire and unemployment begin to trend down slightly. Also, “permanent unemployment” which prior to the recession was close to historical lows, around 5-6 percent, will most likely remain higher than it was prior to the recession due to many of the innovative processes and efficiencies companies put in place during the recession. It would not surprise me to see unemployment stabilize around the 7-8 percent range post-recession.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for an individual.
Securities offered through LPL Financial. Member FINRA/SIPC