Is the job market hot for the wrong reason? US workers are less productive

The hot US job market has been the bright spot of a cooling economy in recent months. Employers are hiring more and more employees, as evidenced by meaningful payslips.

For example, payrolls increased by 315,000 in August and 5.8 million in the last 12 months. And that puts total employment now 240,000 above pre-pandemic February 2020 levels.

Strong payroll numbers have led to fewer jobless claims, which now stand at 215,000, according to a US Labor Department report released this morning. Meanwhile, unemployment — the percentage of the labor force without a job looking for work — is hovering at a multi-year low, even as the country’s GDP performance has declined for two consecutive quarters — a situation some observers would describe as a recession.

“The US is in a period of historic inflation levels, a technical recession with two quarters of negative GDP growth, and yet there is a very tight job market,” Michael Gibbs, CEO of Go Cloud Careers, told the International Business Times in an e-mail. Mail.

So what is behind this disconnect between the labor market and the rest of the economy? A few factors.

First, employment and unemployment are lagging indicators. Companies don’t rush to hire and fire employees as their production needs change. You’ll have to wait to make sure the production change is permanent and not just temporary. And they have to deal with hiring costs like headhunter recruitment fees and severance pay.

“Companies are typically reluctant to hire and fire based on short-term data,” explained Jeremy Babener in an email to IBT. “That’s because the cost of training employees is too high. If you’re too pessimistic, you let someone go and then have to train their replacement. If you’re overly optimistic, hire someone, invest in their education, and then let them go. There is too much ‘friction’ for companies to react to short-term data.”

Second, employment has increased when labor productivity—the output produced by the average worker—decreases. For example, labor productivity fell at an annual rate of 4.1% in the second quarter of 2022. This is due to a 2.7% increase in working hours with a 2.1% drop in performance. Compared to the second quarter of 2021, labor productivity fell by 2.4%, the sharpest decline since the first quarter of 1948.

The increase in hours worked while output decreases suggests that employers need to hire more workers to perform a given job.

This is the wrong reason for an increase in employment as it leads to higher unit labor costs (ULC) or ‘producer’ inflation. For example, the most recent ULC rose 12.7% in Q2 2022, well ahead of consumer inflation, meaning higher labor costs are starting to hurt corporate profitability.

What is behind the decline in labor productivity? Depending on the company, Babener sees several reasons. In some cases, it’s the shift of work from the company to the home, where workers are less focused on doing what they’re supposed to be doing. In other cases, workers are less motivated to get the job done.

“This can lead to companies hiring the wrong kind – hiring more people to maintain the same level of work,” he said. “The right companies will find ways to motivate employees to get involved, show initiative and be proud of their contribution.”

Additionally, companies will find ways to reduce labor costs through automation and layoffs, which could lead to a recession.

“Unfortunately, we’re starting to see companies starting to lay off unnecessary staff and invest in automation technologies to reduce the need for staff,” adds Gibbs. “With the current Fed policy of aggressive monetary tightening, we see a clear recession on the horizon Is the job market hot for the wrong reason? US workers are less productive

Fry Electronics Team

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