The latest Jobs Report from the US confused many
because it showed fewer hires by firms than one would expect given all the
positive news from the economy lately. Lately there has been expansion in
manufacturing, growth in economic activity overall, and increased exports from
the US, showing clear signs that the US economy is doing better than before.
One would think that firms would hire under such conditions, especially to
increase production, but the jobs report contradicts that idea. What is going on
here? First, to be technical, manufacturing has become a pretty small part of
the economy, and General Motors producing more trucks doesn’t mean that
Starbucks will hire more people. In fact, it may not even mean that GM hires
more people, because manufacturing firms can choose between investments and hiring
as ways of increasing production.
But the technical question is not the interesting
part; what should interest us is what firms will actually decide to do. How are
managers thinking about the economy, and their own response to it? There is a
fair amount of research on this, and a recent paper in American Journal of Sociology by Todd Schifeling adds more knowledge. Two clear answers emerge.
First, what managers are thinking about the economy and their own response is
partly driven by what others do. Firms imitated each other in their choices of
how many to hire during recessions, something they don’t do when the economy is
doing well. The usual explanation for imitation is uncertainty, and it makes
sense that a troubled economy is more uncertain than a healthy one. On the
other hand, those who think that managers apply creativity to solve the
problems presented by a recession are probably disappointed to see this.
Recessions are anti-creativity events.
But another effect was equally interesting. During
the 1950s and 1960s recessions that he studied, business leaders were
affiliated with two organizations with opposing views on what firms should do
during recessions. Committee for Economic Development (CED) saw hiring by firms
as a way to fight against recessions, but National Association of Manufacturers (NAM) favored adapting to the recession through reduced hiring. These responses were connected to political ideology, with the CED view seeing firms as important economic problem-solvers while the NAM view saw firms as needing to wait for someone else to fix things. And as it turned out,
one could tell what a firm would do by which of these organizations their
leadership was affiliated with, with CED-affiliated firms hiring more than
NAM-affiliated firms. Then as now, the response to recessions was a political
issue, but the discussion was not just what the state should do, but also what
firms should do.
What does this mean for firms and the economy now?
Well, we know that the economy can recover from a recession by actions from the
state, from firms, or from consumers. Or maybe through some sort of sheer luck.
Many think that the state should do nothing, but these days firms also do
nothing and consumers have learnt not to spend more when the economy is doing
poorly. That leaves luck. The CED style of adapting to recessions is rare now,
but to scholars who are interested in strategy rather than economics it
actually looks pretty interesting. If a firm can afford to maintain and even strengthen
its employment during a recession, will it or the contracting firms be stronger
when the economy starts recovering again? It depends on whether you think money
saved from not hiring is the key source of strength, or whether innovation and production is
more important. It would be interesting to see whether the expanding CED firms
or the contracting NAM firms did better when the economy recovered.
Cronin, B. and J. House. 2014. “Hiring Slowdown
Blurs Growth View.” Wall Street Journal,
January 10, 2014.
