Human resource management in recession
The coming economic downturn, which will likely turn into a recession, will change the way HR policy should be made by small businesses as well as large corporations. A brief window of easy labor availability will allow a return to the fundamentals of good human resources policy, after which we will return to a tight labor market in the long term.
The next economic crisis will be different from typical patterns in two ways. First, we’ll start with a large number of vacancies, almost two for every unemployed person. Some of the cuts will reduce hiring plans rather than actual jobs. Second, consumers accumulated huge savings during the pandemic, when stimulus and wages were high and spending was low. This will make some consumers less sensitive to higher interest rates and less concerned about job loss.
There will be layoffs, however, as the effects of the Federal Reserve’s monetary tightening will not be spread evenly across industries. Some will make drastic downsizing while other sectors will remain understaffed. The hardest hit part of the economy will be interest rate sensitive sectors including construction, business capital goods and big ticket consumer goods.
The crisis will bring short-lived respite from an abnormally tight labor market that has encouraged poor management practices. Low-performing workers were tolerated because it would be so difficult, if not impossible, to replace them. This included not only those who produced little, but also those who upset others by trying to work hard. The tight labor market has also led to poor hiring out of desperation.
The recession or economic downturn will give managers the opportunity to clean up. So, as a first step, first-level managers must identify people who reduce the productivity of others. Most departments can survive with a low productivity employee, but not if that person infects other employees with poor attitudes, poor attendance, sloppy quality standards, or poor customer service.
As hiring new employees becomes easier, getting rid of bad employees is an opportunity not to be missed. While the purpose of firing employees isn’t to intimidate others, sending a signal that disruptive employees won’t be tolerated will help those who don’t know how hard they have to work to keep their jobs. Managers should meet with underperforming workers now and clarify expectations. Such meetings probably seemed fruitless in an environment where the company would not want to fire the worker because a replacement could not be hired. But setting expectations and explicitly stating what employees need to change to meet them needs to happen now, so that those who don’t improve their performance can be fired when replacements become available.
Keeping the guardians will be the next step. As the crisis approaches, first-line managers should anticipate the need to reduce headcount. Senior managers should coach these first-level managers on the decisions they will have to make. The top priority will be to identify gatekeepers, that is, employees who are motivated to do a good job and set an example for their colleagues. It might seem counterintuitive to start layoffs with people in mind who shouldn’t be laid off, but sometimes downsizings are so significant in particular departments that gatekeepers can’t be retained in their current departments or roles. The company should encourage front-line managers to find other places within the company for guards who cannot be retained in their current roles.
When good workers start applying for jobs, the old wisdom should be used: hire the best and fire those who don’t meet expectations. Of course, it will take time for new hires to get up to speed, but in most cases managers can identify in 30 or 90 days who won’t work.
After the recession or downturn, the labor market will tighten again. This decade will see the slowest working-age population growth since the Civil War, as the scariest chart ever shows. After 2030, it will ease only slightly, so companies need to integrate labor-sparse human resource management into their routine practices. The three keys will be improving labor productivity (e.g. through better training, better tools, and better management), improving workforce retention, and improving employee recruitment. Workforce. Order matters: Productivity is most important, followed by retention. And if the retention is good, recruiting becomes much easier.
An economic slowdown is coming, whether or not it meets the formal criteria of a recession. This will be an opportunity for companies to improve their workforce. The business that misses the opportunity will likely be competing with a business that has higher labor productivity, a business that is very difficult to compete with.