The fall and rebound in employment growth usually lags a few quarters behind the fall and later recovery in output growth in any recession because of labour hoarding. Hamermesh (1993) defined labour hoarding as
a less than proportionate decrease in worker hours in response to a negative demand shock
Firms may hoard or retain under-utilised employees despite falls in demand because of demand uncertainty.
Becker (1975) and Oi (1962) both refer to the fixed costs of employment as an incentive to retain experienced workers with firm-specific human capital during lulls in demand.
The fixed costs of employment are the costs of recruiting and training workers. These fixed costs meant that the demand for labour does not adjust instantly to changes in demand for the firm’s product:
The cyclical behaviour of labour markets reveals a number of puzzling features for which there are no truly satisfying explanations . . .
I believe that the major impediment to rational explanations for these findings lies in the classical treatment of labour as a purely variable factor (Oi 1962).
Hirings and layoffs are costly. Hiring costs include advertising vacancies, the time spent finding and screening applicants and training. Layoff costs include redundancy payments, legal procedures and, importantly, the capital loss of losing access to experienced employees with firm-specific training and then later having to train their replacements.
To reduce these current and capital costs early in recessions, employers will first adjust hours worked and rely on natural attrition of staff to defer laying off their more experienced employees. Only once these options have been exhausted, and demand for the firm’s product is still slack, the capital loss of laying off a worker may become necessary.
Labour hoarding is a speculative investment based on forecasts of demand. The decline in product demand must be seen as short. There will be more layoffs if the recession is expected to be deep or long.
If there is a quick recovery, unnecessary layoffs and the cost of training replacements are both avoided.
Utopia, you are standing in it! 
Recent Comments