Proxima Blog

Stop riding the labor roller coaster

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Within a short span of days late last month, we learned that in the final quarter of 2012, the US economy contracted for the first time in three and a half years – the nation’s gross domestic product shrinking by .01 percent.

On top of that, we were told that the national unemployment rate, a continuing source of agony since the Great Recession began in 2008, has ticked back up a notch to 7.9% with only 152,000 private sector jobs created in January.

Not welcome news in any environment, let alone in the midst of one of the most arduous and fragile recoveries in history.

But in nearly the same breath, the Dow Jones Industrial average has surpassed the 14,000 milestone for the first time since 2007. Economists and analysts tell us the year-end contraction was a one-off event triggered primarily by cuts in defense spending. We’re also told that other telltale economic indicators - consumer confidence and housing – are strong and that 2% growth is expected in the first quarter of the New Year.

So what to make of the US economy? That’s what those who find themselves counted among the unemployed want to know.  While that’s a figure hovering around 8% mark, new research shows how far-reaching and devastating job cuts have been since the start of the economic downturn.  A survey released this month by the John J. Heldrich Center for Workforce Development at Rutgers University found that layoffs have touched nearly every American household in some fashion or another over the last few years.  The findings indicate that nearly a quarter of Americans say they were laid off at some point during the recession or afterward. More broadly, nearly 8 in 10 say they know someone in their circle of family and friends who lost their job.

But, those without jobs aren’t the only ones impacted by the mixed economic signals: those who control their fate – the hiring managers – are, as well. And, when the messages are mixed, the impact on labor and hiring is usually spontaneous and volatile with employers typically rushing to increase headcount in response to good news only to immediately slash labor costs when things go sideways.

Knee-jerk reactions, as it relates to labor costs, are detrimental not only to a corporation’s bottom line but to the morale of the rank and file as well. We already know from our research the relatively diminished impact labor costs have on EBITDA compared to non-labor costs.  To refresh your memory: 12% of revenue is spent on labor (down from 15% three years earlier). If you reduce your labor costs by 1%, you increase profitability by only 0.8%. By contrast, if you reduce your non-labor costs by the same 1%, you increase profitability by 3.6% - five times greater. 

The research dictates a clear path for corporations: they need to stop riding the labor market roller coaster and instead focus more consistently on managing the non-labor costs that have tangible impact on profitability. Doing so has the potential not only to lift profits and stabilize the workforce, it may also provide a bit of a cushion against future setbacks, perhaps alleviating the unpleasant and costly task of removing someone from their job to only find out that once the economy rebounds they will be in the unpleasant situation to find the same talent they once dismissed.