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Wednesday, April 1, 2020

ANALYSIS How high will unemployment in America go?

by Judith Stein and Biodun Iginla, The Economist Intelligence Unit News Analysts

The financial crisis looks a better reference point than the Depression

United States

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IN AUGUST 2005 the unemployment rate in Louisiana was 5.4%, close to its all-time low. Then Hurricane Katrina hit. The storm destroyed some firms, while others were forced to close permanently. Within a month, Louisiana’s unemployment rate had more than doubled.

Now America as a whole faces a similar shock. From a five-decade low, unemployment is soaring upwards, as the onrushing coronavirus pandemic forces the economy to shut down. Millions of Americans are filing for financial assistance. The jobs report for March, to be published on April 3rd, is a flavour of what is to come—though because the survey focused on early to mid-March, before the lockdowns really got going, it is likely to give a misleadingly rosy view of the true situation. How bad could the labour market get?

GDP growth and the unemployment rate tend to move in opposite directions. Unemployment hit an all-time high in 1933, during the Great Depression (see chart). The coronavirus-induced shutdowns are expected to lead to a year-on-year GDP decline of about 10% in the second quarter of this year. Such a steep fall in economic output implies an unemployment rate of about 9% in that quarter, based on past relationships, which would be roughly in line with the peak reached during the financial crisis of 2007-09.

But the coronavirus epidemic is not like past recessions. For one thing, hiring could be even lower than is typical. Delivery firms notwithstanding, surveys suggest that firms’ hiring intentions are as low or lower than they were in 2008. And applying for a job is especially difficult with cities in lockdown. Even without a single virus-induced layoff, hiring freezes would lead to sharply rising unemployment. For instance, young people entering the labour market for the first time would struggle to find work.

The decline in GDP associated with the lockdowns is also particularly concentrated in labour-intensive industries such as leisure and hospitality. Mark Zandi of Moody’s Analytics, a research firm, calculates that more than 30m American jobs are highly vulnerable to closures associated with covid-19. Were they all to disappear, unemployment would probably rise above 20%. Research published by the Federal Reserve Bank of St Louis is even gloomier. It suggests that close to 50m Americans could lose their jobs in the second quarter of this year—enough to push the unemployment rate above 30%.

The numbers will probably not get that bad. In part that is a matter of statistical definitions. To be officially classified as unemployed, jobless folk need to be “actively seeking work”—which is rather difficult in the current circumstances. Some people could end up being counted as “economically inactive” rather than unemployed, which would hold down the official unemployment rate (a similar phenomenon occurred in Louisiana after Katrina).

America’s economic-stimulus bill will be a more genuine check on rising joblessness. The $350bn (1.6% of GDP) set aside for small firms’ costs is enough to cover the compensation of all at-risk workers for perhaps seven weeks, according to our calculations, making it less likely that bosses will let them go. Other measures in the package should support consumption, and thus demand for labour. In a report published on March 31st Goldman Sachs, a bank, argued that unemployment will peak in the third quarter of this year at nearly 15%—an estimate that is roughly in line with those of other forecasters.

A big jump in unemployment is less of a problem if it quickly falls once the lockdown ends. Louisiana offers an encouraging precedent. After a few bad months in late 2005, the state’s unemployment rate dropped almost as sharply as it had risen, falling in line with the rest of the country. Whether the economy will prove so elastic this time is another matter. Travellers and restaurant-goers will be cautious until some sort of vaccine or treatment is widely available; social-distancing rules, even if relaxed, will continue for some time. Goldman Sachs’s researchers reckon that it will take until 2023 for unemployment to fall back below 4%. The lockdowns should be temporary, but the economic consequences will feel much more permanent.■

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Tuesday, March 24, 2020

ANALYSIS: The coronavirus crisis thrusts corporate HR chiefs into the spotlight

In a pandemic, a chief people officer can make or break a company

by Judith Stein and Biodun Iginla, The Economist Intelligence Unit News Analysts

Business

WHEN THE financial crisis rocked the business world in 2007-09, boardrooms turned to corporate finance chiefs. A good CFO could save a company; a bad one might bury it. The covid-19 pandemic presents a different challenge—and highlights the role of another corporate function, often unfairly dismissed as soft. Never before have more firms needed a hard-headed HR boss.

The duties of chief people officers, as human-resources heads are sometimes called, look critical right now. They must keep employees healthy; maintain their morale; oversee a vast remote-working experiment; and, as firms retrench, consider whether, when and how to lay workers off. Their in-trays are bulging.

Once derided as “pay and parties” managers, by the early 1990s HR chiefs turned to compliance, keeping firms out of the courts (and papers). A subsequent string of corporate imbroglios elevated their status, notes Patrick Wright of the University of South Carolina. In the wake of executive-pay scandals at companies such as WorldCom and Tyco in the 2000s they became more involved in remuneration. A decade later bungled successions, for example at HP, a printer-maker which sacked two bosses in as many years, left them with a bigger say in filling top jobs. In the past few years they have dealt with companies’ often very public “me too” troubles.

As recruiting and retaining skilled workers became chief executives’ big preoccupation—four-fifths now worry about skill shortages, up from half in 2012—HR heads’ desks moved ever closer to the corner office. Today many reside right next to the boss. Shareholders are inviting more outside HR chiefs to boards. In America their salaries remain lower than CFOs’ but have risen 20% faster since 2010 (see chart).

A higher profile entails new expectations. HR was once the domain of history graduates and masters in labour relations; nowadays plenty hold business degrees. Although most firms recruit them from HR jobs, more are choosing outsiders or unconventional candidates. According to Russell Reynolds, an executive-search firm, HR heads appointed to Fortune 100 companies between 2016 and 2019 were around 50% likelier than earlier hires to have worked abroad, in general management or in finance.

Before covid-19, tight labour markets and empowered employees pressed employers to understand how to get the most out of their staff, says Dane Holmes, a former head of human-capital management at Goldman Sachs, an investment bank, who now runs an HR-analytics firm. Diane Gherson, who runs HR at IBM, overhauled the computing giant’s performance management using big data. Algorithms now challenge IBM managers’ instincts on pay and promotion, and alert Ms Gherson’s team when staff are at risk of fleeing (often before they realise it themselves).

The pandemic makes such “people analytics” more relevant. Beth Galetti, Ms Gherson’s opposite number at Amazon, an engineer with no HR experience before joining the e-commerce titan, oversees 1,000 developers working exclusively on HR software. Amazon’s pre-outbreak investment in digital induction for fresh hires is paying off. “We on-boarded 1,700 new corporate employees on [March 16th] alone,” Ms Galetti reports.

Covid-19 may lead more HR chiefs to adopt such systems. In the short run many have more pressing problems. Mala Singh, chief people officer at EA, a maker of video games, represents the c-suite on the team tasked with pandemic response. This now occupies 60-70% of her (long) day. Her team has been getting staff desks, computers, even noise-cancelling headphones. A bigger concern was balancing work with child care. Ms Singh told the caregivers on EA staff to take as much time as they need to adapt without using up paid leave. She is digitally monitoring employee sentiment, particularly anxiety. In a creative business like EA’s, “having someone stressed about their family situation does not enable productive work”, she explains.

Many companies, especially outside the knowledge economy, face tougher choices. HR leaders must strike a balance between a firm’s professed purpose, which these days often involves treating staff decently, and the bottom line, observes Dan Kaplan of Korn Ferry, a consultancy. The instinct is to cut costs through mass redundancies, as some hotel chains, airlines and others have begun doing. Rather than slash payrolls indiscriminately, says Bill Schaninger of McKinsey, another consultancy, good HR heads can use the crisis to reconfigure company workflow: what needs to be done by whom, what can be automated and what requires people to share the same space. Some workers who at first appear redundant may be redeployed or reskilled.

The most far-sighted HR-ers at the most resilient companies are already starting to look beyond the flattened curve. Although not quite recruiting—times are too uncertain—Ms Gherson has begun to court talent at rival firms. Now that everyone is working from home, she says, no one is listening in on their calls. For a savvy HR chief, “it’s the perfect opportunity.”