Dip In Labor Costs Shows Employers Are Too Afraid To Hire

Never mind the talk of economic growth supposedly resuming and improving U.S. fortunes. In the country's boardrooms, the conversation remains fixed on how to stay lean and cut costs.

This was the unmistakable takeaway from two pieces of data released by the federal government Wednesday. Together, they described a powerful source of economic anxiety: People are working harder than ever, creating more goods and services, while being paid less for their time.

In economic parlance, workers are delivering "productivity growth": Their output per hour increased by half of 1 percent over the first three months of 2013, the Labor Department reported, even as labor costs dropped at an annualized rate of 4.3 percent, the sharpest such plunge since 1947.

In everyday language, people who have jobs are getting squeezed while employers keep their payrolls lean. In many areas of business, management remains deeply reluctant to hire new workers for fear that a still tenuous economic recovery will not hold, leaving them with too many people if business slows again.

“It’s a reluctance to be a significant risk-taker in this environment because the confidence isn't there,” said Robert Moritz, U.S. chairman of the accounting firm PriceWaterhouseCoopers, who regularly speaks with top-level executives at major companies. “You do have a cautious business leadership team that says: 'How much can I get with what I have right now? I can continue cost-cutting. I can continue focusing on productivity.' I think that trend will continue."

Even as the long-suffering American housing market improves, underscoring faith in continued economic expansion, CEOs of major companies remain extremely cautious about hiring, Moritz said. This creates a feedback loop of weak hiring: Every company that declines to hire and expand -- minimizing opportunities for growth throughout the economy -- simply reinforces the concerns of other companies, further discouraging anyone from hiring.

“They’re being followers, in terms of following the signs to make sure there’s a sustained amount of positive signals in the economy,” Moritz said.

Some suggested that the drop in unit labor costs was likely an anomaly fueled by tax gimmicks. Companies saw their unit labor costs increase by 11.8 percent in the last quarter of 2012 only because they “moved up” compensation due in 2013 to help employees avoid future taxes. (Washington raised the effective payroll tax rate in January.)

But other reports supported the notion that payrolls are still being pared. A closely-watched -- if volatile -- report from the payroll services firm ADP estimated that the private sector added 135,000 jobs to the U.S. economy last month, widely considered a disappointing number.

Until the people running businesses have a greater sense that their counterparts at other companies are inclined to hire, stagnation could prove difficult to transcend.

“I do think that the willingness of those CEOs expand their labor force is going to be something that’s going to be done very cautiously,” Moritz said. “That’s something that’s not going to happen any time soon.”