Where are the jobs? Of all the questions coming out of the financial crisis, this is the big one. In August, the U.S. economy added no new jobs for the first time in 11 months.
Persistent low employment is part of a complex global picture of supply and demand, but there’s one factor that should be getting more attention: U.S. companies don’t want to hire people.
Employees come with a host of costs and liabilities. When there’s work, it makes more sense to find a way to get it done without putting someone on the payroll.
A loyal, experienced workforce is an important asset for a company to sacrifice. Yet many people who would prefer to be employed full time at permanent jobs will be working on a contingent basis, taking temporary jobs and working as independent contractors, as the economy slowly recovers.
This trend is now so widespread that the pattern is likely to become permanent. You can see it in the numbers. Every time the U.S. economy emerges from a recession, a leading indicator is an upturn in the temporary jobs market. According to Staffing Industry Analysts, which follows the business of temporary employment, in the first quarter of 2011 the staffing industry grew an impressive 19 percent. By some broadly defined measures, contingent workers already represent 25 percent of the workforce -- a figure that’s steadily rising.
Over the long term, that’s not necessarily bad. Younger people are more mobile and don’t want to be shackled to one employer by their benefit packages. Older people would rather have some opportunity to work than none at all. Contingent work has the potential to partially bridge the enormous gulf between the secure work and high benefits that former generations enjoyed, and today’s scant supply of either one.
What is an employee? There is no single definition either in applicable laws or common understanding, but let’s describe it as somebody who has a full-time job that includes at least the minimal benefits of workers’ compensation and unemployment insurance. Even at the tiniest companies, full-time workers usually have these robust, statutorily mandated forms of insurance. They come with onerous record-keeping requirements that are extremely expensive for employers to administer in addition to the cost of the benefits themselves.
Employers work hard to minimize these costs. States are vigorously enforcing laws to prevent SUTA dumping (State Unemployment Tax Avoidance), in which companies move employees among subsidiaries to game the numbers that drive their unemployment tax rates. An easier way to minimize unemployment insurance costs is to not hire permanent employees in the first place -- one significant reason for the growth of the contingent workforce.
Another cost of having permanent employees is the liability associated with anti-discrimination laws. This includes the expense of administering legal compliance, training employees and insuring against the inevitable lawsuits. Turning to contingent workers relieves this burden because these workers sign up to be fired the day they’re hired.
The package of other benefits that companies provide also deters them from adding employees. Health insurance is a huge cost. Retirement plans are another. Companies have been unburdening themselves from their pension contributions, but even if a plan is 100 percent employee-funded, it’s expensive to administer.
Other, smaller expenses add up: matching plans for charitable gifts, diversity programs, meetings to decide whether to have casual Fridays. Companies will not get rid of these costs, but can make the most efficient use of resources through contingent labor. In this model, human resource departments manage labor procurement from a network of sources, considering all costs, including the most basic.
Hiring, firing and rehiring is the most fundamental cost of having employees: From interviews, background checks, drug tests, benefits processing and training on the way in, to the cost of reversing all that on the way out. If someone is hired to replace the departing employee, the process begins again. You can see how much easier it is to save the money by hiring an independent contractor or a worker from a staffing agency.
The aging of the U.S. workforce interacts with the cost of hiring and benefits in a way that hurts full-time employment. Older workers cost a company disproportionately in benefits, and companies can’t discriminate against them in firing, which makes them reluctant to hire. Contingency work is going to be a solution for many people. It is flexible for the worker even though it provides less security, and is growing more common, and better respected, in professional fields like law, accounting and finance.
Pressure Won’t Abate
The pressure on companies to move further in this direction is unlikely to abate in a muted economic recovery. A business that has $1 billion of revenue and 100 permanent employees will always be judged more favorably by Wall Street than an identical business with 500 permanent employees. Companies are rewarded for financial flexibility, which means constantly shifting their cost structure toward variable rather than fixed costs. It is only a matter of time before chief executive officers begin bragging about how much their contingent workforce contributes to shareholder value and productivity.
(Alice Schroeder, the author of “The Snowball: Warren Buffett and the Business of Life” and formerly a top-ranked insurance analyst on Wall Street, is a Bloomberg View columnist. The opinions expressed are her own.)
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