The Human Factor

Despite all the headlines, don't expect a bigger blizzard of pink slips. Recent chronic labor shortages make for an unusual downturn

Julie Jones jumped at the chance to take a sabbatical when Accenture Ltd. (ACN ) offered one in June. Although she had been a consultant in the firm's Chicago office for just two and a half years, the 25-year-old expert in accounts-payable software had long wanted to work for AmeriCorps, the national volunteer group. So in July, Jones, who's single, headed out to Los Angeles for a year to join an AmeriCorps group that helps nonprofits with technology problems. Accenture, the former consulting arm of Andersen Worldwide, will pay 20% of her salary, plus benefits, and let her keep her work phone number, laptop, and e-mail. "This gives me the security of knowing I'll have a job when I come back," says Jones.

Accenture hopes the program will offer it some security, too. The economic slowdown has pinched the company's business, forcing it to rein in costs. But after years of scrambling to find scarce talent, Accenture is reluctant to lay off workers it hopes to need when the economy turns north again. Accenture did cut 600 support staff jobs in June. But to retain skilled employees, it cooked up the idea of partially paid sabbaticals, such as the one Jones is taking. About 1,000 employees took up the offer, which allows them to do whatever they want for 6 to 12 months, says Larry Solomon, Accenture's managing partner in charge of internal operations. "This is a way to cut costs that gives us the ability to hang onto people we spent so much time recruiting and training," he says.

Plenty of other employers are feeling the same way. The slumping economy has put pressure on companies to slash expenses and boost sagging profits. But the U.S. has just sailed through five years of labor shortfalls on a scale not seen in more than three decades. What's more, the unemployment rate, while rising, remains at historically low levels. Many employers are wary about dumping too many workers just to find themselves scrambling later to refill the positions.

Indeed, a return to chronic labor shortages is a likely scenario for years to come. Although growth in gross domestic product slipped to an anemic 0.7% in the second quarter, the consensus forecast among economists is that the U.S. will recover in the next 6 to 12 months. If that happens, the jobless rate may climb a bit more because it tends to lag somewhat in an economic recovery. But according to 50 economists tracked by Blue Chip Economic Indicators, unemployment won't go much above 4.9% this year or next. "This looks like the recessions in the 1950s and 1960s when we had high productivity growth and labor shortages," says David A. Wyss, chief economist at Standard & Poor's, a unit of BusinessWeek's publisher, The McGraw-Hill Companies.

What's less certain is whether the labor market will snap back for workers at all levels. One of the hallmarks of the late 1990s' boom was the fact that supertight labor markets fueled job growth up and down the skill ladder. Employers were so desperate for bodies that the wages of even the lowest-paid workers topped inflation, according to an analysis of Bureau of Labor Statistics (BLS) data by the Economic Policy Institute, a Washington, D.C., think tank. The result: The fullest employment in three decades served as a sort of de facto social program, helping to solve many of the country's most intractable ills. Poverty levels plummeted, inner cities became more attractive investments, and low-income families made significant economic strides for the first time in years.

Already, though, the slowdown has taken the edge off the demand for less-skilled workers. As unemployment began to rise last year, their average wage gains fell to almost zero, the Economic Policy Institute (EPI) found. Unless unemployment returns to the 4% level, those at the bottom may not see such good times again anytime soon. What's more, continued immigration, especially from Mexico, where many workers who travel north are low-skilled, is likely to dampen gains even more. If low-end workers do return to the days of stagnant or falling pay, the problems will spill over into many areas. Inner cities may start to sink again, and welfare reform would run into trouble. In addition, already squeezed cities and states would face more demands for social-services spending. Either way, the sober new atmosphere is sure to leave many Americans more chastened about their economic prospects.

On the other hand, college-educated workers are likely to skate through the slowdown with greater ease. Despite the high-profile fiascos of many high-tech companies, the jobless rate for white-collar workers remains at just 2.2%. Employees in the top wage brackets have seen little slackening off in their wage gains, according to EPI, suggesting continued strong demand for their talents. The demand for skilled workers is likely to be fueled even more if their supply weakens. Already, college enrollments are slowing, and falling financial aid may squeeze out more poor kids. The likely outcome: a resurgence of inequality as the rich get richer again while the less-skilled lose ground.

No question, employers are still pulling their punches in the face of a gloomier economic outlook. Not that there hasn't been some high anxiety about rising layoffs this year. But so far, they have been surprisingly modest. Companies laid off a total of just 244,000 employees in the first quarter and probably less than 350,000 in the second, according to preliminary BLS figures. It's a turn for the worse, but consider how high the numbers have been in recent years--most notably in 1998, when employers laid off 402,000 workers in the second quarter.

Even companies that have handed out pink slips often did so with caution rather than abandon. When Charles Schwab Corp. (SCH ) first saw business deteriorate last fall, it put projects on hold and cut back on such expenses as travel and entertainment to avoid layoffs, says Human Resources Vice-President Ruth K. Ross. In December, as it became clear that more was needed, top executives all took pay cuts: 50% for the company's two co-CEOs, 20% for executive vice-presidents, 10% for senior vice-presidents, and 5% for vice-presidents.

Schwab took further steps this year before finally cutting staff. It encouraged employees to take unused vacation and to take unpaid leaves of up to 20 days. Management designated three Fridays in February and March as voluntary days off without pay for employees who didn't have clients to deal with. Only in March, after the outlook darkened yet again, did Schwab announce 2,000 layoffs out of a workforce of 25,000. Even then, the severance package includes a $7,500 "hire-back" bonus that any employee will get if they're rehired within 18 months. "We felt the markets will turn at some point, and the cost of hiring people back with the bonus is small compared to what it would be to pay for recruiting and retraining new employees," says Ross.

Employers also are trying to protect their core workers by axing temps and contract employees. Throughout the 1990s, many companies built up buffer workforces so they could more easily adjust staffing levels. Since 1990, the number of temporary employees tripled, to a peak of 3.6 million last fall. But since then, their ranks have fallen by half a million as companies have tried to adjust to slower sales.

Slashing work hours is another way to reduce payroll without lopping off heads. The workweek has edged steadily downward as the economy slowed, to 34.3 hours for most of this year. Manufacturers, hit the hardest by the economic slump, have dialed back the most. Factory overtime has fallen by about 15% from last year, to four hours a week in June. The factory workweek has plunged by a similar amount, to 40.7 hours. "Businesses have aggressively cut hours worked, which is the first thing you do if you want to hang onto staff," says Mark M. Zandi, chief economist at Inc. in West Chester, Pa.

The result of all these trends has been a relatively modest upturn in unemployment. The jobless rate has jumped up to 4.5% since hitting a 30-year low of 3.9% last fall. But that's still below the 5% or even 6% that most experts had considered full employment for some two decades. It's also much lower than the spike that occurred during the last recession, in 1991. Back then, unemployment soared from a low of 5% to a peak of 7.8%. The rate probably will continue to inch higher throughout the year as companies face up to the fact that the sales volumes they had geared up for in 2000 aren't going to materialize. But if the consensus among economists is right, labor, especially the more skilled kind, will remain scarce for the foreseeable future. "Even if we get unemployment up over 5%, it won't free up more nurses or computer programmers," says S&P's Wyss. "There aren't enough of them to go around."

Even high-tech workers are likely to remain in demand. Employers will have about 900,000 job openings this year for programmers, software engineers, tech-support personnel, and similar workers, according to an April survey by the Information Technology Association of America (ITAA), an industry group based in Arlington, Va. That's down sharply from 1.6 million openings in 2000. But the survey found that even this year, companies believe that they will be unable to fill nearly half of those jobs, or 420,000 positions. "Demand for workers remains strong," the report concluded.

Part of the reason is that most of these posts aren't at high-tech companies, which have borne the brunt of the sharp falloff in demand for computers and telecom equipment. Roughly 90% of the country's 10.4 million tech workers are employed by non-high-tech companies, the ITAA found in its survey. Employers say they will have a total of about 640,000 openings this year.

Still, even battered tech companies would like to hire 260,000 skilled workers this year--and expect to be able to find just half of those they need, according to the survey. "We're still hiring for some critical areas, like electrical engineers," says Matt McKinney, a spokesman for Texas Instruments Inc., which announced 2,500 layoffs in April. "Every year, the universities graduate fewer students in these areas, so the available talent pool is shrinking. Yet demand still goes up."

WILD CARDS. Taken together, then, the combination of subdued layoffs and continued hiring has kept total employment relatively strong despite the slowdown. In the recession of the early 1990s, payrolls slumped as soon as the economy softened. Employers shed nearly 2 million jobs before the recovery began. By contrast, employment growth in this go-round stopped only in the first quarter of this year, months after the economy began to sputter. So far, employment has only slumped by 600,000, and most economists expect job growth to resume in the third quarter.

Of course, the outlook for continued labor shortfalls depends heavily on whether such predictions turn out to be true. The current slowdown hasn't yet shrunk GDP. But if consumers stop spending and economic growth turns negative, companies may cut hiring even more or start laying off more aggressively. If they do so for too long, unemployment may spike more than economists anticipate. Corporate profits are a wild card, too. Profits plummeted 52% in the second quarter, on the heels of a 25% slump in the first quarter. Most observers expect the Federal Reserve's interest-rate cuts to kick in and lift up demand. However, unless that happens soon, employers may feel pressure to cut costs--and jobs.

Absent a full-blown recession, though, skilled workers are likely to remain in short supply. The same may not hold true at the bottom of the labor market, which is unlikely to see solid wage growth without a return to the extraordinary growth levels of 2000. That leaves the U.S. facing renewed social cleavages as those on the top continue to gain while the rest struggle to keep up.

By Aaron Bernstein

    Before it's here, it's on the Bloomberg Terminal.