Why Companies Aren’t Hiring

The headlines have been full of stories about unemployment, the so-called “jobless recovery,” and lately we’ve been hearing about a potential double-dip recession. So when a colleague suggested I tackle the subject of why businesses aren’t hiring, I figured I could throw in my two cents.

First let’s talk about unemployment. As of July 2010, the most recent month for which statistics are available as I write this, the Bureau of Labor Statistics calculated the U.S. unemployment rate at 9.5%. That’s 14.6 million people who are unemployed. And many argue that the true unemployed number is much higher and that the 14.6 million counted by the BLS are only those who continue to actively look for work.

Those are some scary numbers, but someone shared this link with me, which shows the increase in unemployment county-by-county across the United States. It really made an impression. Things are bad all over.

So why is the unemployment rate hovering so close to double-digit territory? Like most things, there isn’t a single answer to that question, but here are some observations.

Companies have been hit hard by the recession. Consumers have cut spending, and  to continue to be profitable — or in some cases, just survive — businesses have had to do the same. That means employing fewer people — especially since this country’s economy is largely a service economy. We’ve let much of our manufacturing leave and go overseas. The companies that remain are predominantly service businesses. Those businesses need people to deliver their services. Times get tough and people purchase fewer services, so companies needed fewer people to deliver what is being bought.

We’ve seen about a 50% increase in the stock market since it bottomed out in 2009, but that doesn’t mean that companies are doing 50% better than they were last year. I would argue that the market was undervalued when it hit bottom and it may be overvalued today. I say that because much of the improvement in profits came from cutting expenses. Don’t get me wrong, cutting excess cost out of a business is a good and prudent thing to do. But you can’t cut your way to prosperity.

So companies make cuts, Wall Street applauds, and the stock price rises. But what happens when you can’t cut anymore? At some point, when you’ve cut all the costs you can, you need to increase revenue if you want profits to increase. I’m not convinced that revenue growth is driving the improvement in stock prices. How much longer can companies cut before they hit bone?

Companies have cut the excess expense — and then some — out of their operations. Now what? We don’t see consumers flooding back. In fact, the American consumer is spending less, so with no more cuts to make and no new revenue being generated companies are loath to hire.

Remember, it’s not fun to let people go. Once you’ve bitten that bullet, you’re not going to rush back in and face the prospect of having to do it again. So, in my estimation, companies won’t hire until they’re confident that revenue growth has returned.

Now it becomes a bit of a “chicken or the egg” dilemma. I won’t hire until I see sustained revenue growth, but consumers won’t spend until they get back to work or feel more secure about their current employment. We’re locked in a bit of stalemate, and I’m not sure what the resolution is.

What should be done next? A lot smarter people than me are trying to figure out that.

In our company, we’ll try to run the business as conservatively and leanly as possible. That means making sure that every employee is contributing, evaluating the return on investment expected if we were to hire for a position, and scrutinizing every candidate carefully to make sure we get the best person. One thing can be said about 9.5% unemployment: A lot of really good candidates are looking for work.

What would cause me to be bullish on hiring? I need to see revenues begin to grow again. And if you can help me do that, well, I just might be hiring.

For another businessperson’s perspective on why he’s not hiring, take a look at this Wall Street Journal piece from earlier this month.