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As inflation and the cost of doing business increase, you might expect more companies to lay off employees en masse. However, the opposite is happening. For September 2022, the unemployment rate fell to just 3.5 percent – one of its lowest levels in U.S. history – and that’s partly due to the fact that many employers are hanging on to their workers tighter than a pre-teen on a roller coaster, even amidst the country’s economic challenges.
Since employee salaries can account for roughly 20 to 50 percent of a company’s operating budget, per FreshBooks, downsizing your workforce might seem like a logical way to cut costs during the current economic downturn. You may be asking yourself, “Why are some businesses keeping their employees instead of laying people off?”
The answer is probably that they’re labor hoarders.
What is labor hoarding?
When you hear the term “hoarder,” you might imagine someone with an uncomfortably packed house full of newspapers, books, clothes, junk mail and old receipts. You’re not wrong. A hoarder is someone who collects an excessive number of objects, even if they have no real need for those items. In this case, the “items” we’re talking about are employees.
Labor hoarding occurs when employers refuse to conduct layoffs, even when they’re operating in an economic downturn and letting a few employees go would make sense. Instead, they’re keeping their workforces steady and maintaining virtually all of the company’s staffers. Businesses of any size or industry can hoard employees, and many of them are doing so right now.
Why would an employer want to hoard employees?
Instead of cutting costs by way of mass layoffs, a large number of employers are choosing to hang on to the talent they currently have. While this may not make sense at first glance, many businesses have good reasons for labor hoarding.
Recruitment costs
For starters, the cost of replacing an employee, which is the same as the cost of a bad hire, is enough to make anyone want to start hoarding team members. The Society for Human Resource Management (SHRM) released new benchmarking data in 2022 that estimates the average cost of hiring a new employee is nearly $4,700, and other experts estimate that expense to be up to four times the position’s salary. Oof!
Not only that, sourcing talent and recruiting new employees takes time. Although the time it takes to fill an open role can vary by location, industry and position, the average is about one month. And that’s not all. After you’ve hired that new worker, you’ll need to take additional time to properly onboard and train them.
So while it might make financial sense to lay off employees at the moment, many employers know they will eventually have to rehire and train new ones, and they realize the long-term cost of doing so isn’t worth the short-term savings. Labor hoarding is better for these businesses in the long run.
Talent shortages
The unbelievably low unemployment rate is another reason why many employers are resorting to labor hoarding. They understand that valuable employees are hard to come by, especially now when there are nearly two open jobs for every unemployed worker, according to data from the Bureau of Labor Statistics.
As more employers hoard their current employees, fewer workers are available for hire. This can lead to staffing problems, which can, in turn, cause businesses to want to keep every employee they have – continuing the vicious cycle. So, although employers might be able to get away with laying off a few workers right now, rehiring at a later date might not be so easy due to a lack of available talent. That makes companies want to keep the people they have instead of dealing with talent shortages.
Young workers have become pickier about their terms of employment. Check out these labor shortage myths and facts to learn why some young adults intentionally remain unemployed.
What are the potential consequences of labor hoarding?
While labor hoarding might sound like a good way to reduce employee turnover and the costs of recruitment, it may not always be a smart idea. Each business is unique, which means your staffing efforts need to be tailored to your organization’s specific situation.
For example, we already know that keeping more employees on staff can potentially save you money in the long run, but for some businesses, that isn’t the reality. If your staffing needs have dramatically decreased and you anticipate that won’t change anytime soon, labor hoarding might be more harmful than helpful to your business.
Labor expenses
One potential downside of keeping employees on the team while business is down is that it can put you in the red financially. Remember that statistic earlier about salary expenses? Those are costs you will continue to incur if you continue to hoard team members. Spending money you don’t have can be a problem, which is why some employers resort to layoffs.
If laying off employees is your best (or only) option, be sure to provide them with a termination-of-employment letter.
Employee resignations
Additionally, labor hoarding can actually cause employees to quit. Although this might sound counterintuitive to everything we just told you, hear us out: Too many employees and not enough to do can lead to underutilization, which can decrease employee engagement and job satisfaction and, ultimately, increase resignations. [See business.com’s study on how a lack of job satisfaction prompts workers to seek new jobs.]
In another scenario, imagine you own a retail store, and for economic reasons, customers tighten their purse strings and your sales drop significantly. As a result, you reduce your store hours. If you decide to keep your entire team on the payroll instead of making a few layoffs, you’ll likely have to cut employee hours. This could result in employee frustration and similarly lead to resignations.
In other words, if you intend to hoard employees, make sure your company continues to be a desirable place to work and that you can truly afford to keep all those workers. Otherwise, the strategy may backfire.
How do you know if labor hoarding is right for you?
While labor hoarding is a popular and often effective trend, it isn’t the right staffing solution for everyone. Take a full inventory of your workforce, analyze your current and future staffing needs, and factor in your short- and long-term financial capabilities.
You certainly shouldn’t hoard employees you don’t have a current or future need for, but remember, great employees can be hard to find and even harder to attract. If you’re going to become a hoarder, being a labor hoarder is probably the healthiest option. Happy hoarding!