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
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.