UK employees learn the three business Rs

Economists have been posed a challenging riddle. How is it that a sluggish
UK economy has managed to create more than 200,000 extra jobs in the past year,
even though the redundancy rate – running at 8.6 per cent – is higher than at
any time since the mid-1990s?

The answer partly lies in unbalanced growth. Substantial job gains in
services and construction have transfused a major haemorrhaging in
manufacturing jobs. In addition, even employers facing weaker market conditions
have, where possible, maintained staff levels in the expectation that the
economic slowdown would be short-lived. This has enabled growth sectors to add
to the jobs pool, albeit at the expense of a sharp drop in the rate of growth
of productivity.

But in order to fully understand current labour market trends, it is also
important to appreciate that redundancies are not confined to sectors where
employment is falling. Although, at present, manufacturing redundancies far
exceed those of any other individual sector, they account for only one-third of
all layoffs. Substantial numbers of redundancies are also being recorded in
sectors where employment is rising, including construction, distribution,
hotels and restaurants, and public administration, education and health.

This results from an emerging ‘3Rs’ effect – ongoing and simultaneous
reorganising, redundancy and recruitment within organisations. Employers are
continually reorganising their workforces in order to improve performance, in
the process of laying-off less productive workers while recruiting and
developing others. This is apparent from the CIPD’s regular employer surveys,
which show the most common reason for redundancies is reorganising, far ahead
of the need to reduce costs or respond to falling sales.

These surveys also show that employers fear large-scale redundancy
programmes because they will unsettle valued staff and make recruitment
difficulties worse by damaging the employer brand. This provides organisations
with an incentive to use redundancy as a strategic tool rather than a knee-jerk
panic response to short-term pressures.

Consequently, the UK may be less of a crude ‘hire and fire’ economy than
many commentators claim. Yet it is equally possible employers are behaving this
way simply because the current slowdown has been relatively mild. Companies in
the US, by contrast, were very quick to shed labour when the economy fell into
recession in 2001, despite constant warnings of the downside of downsizing.
This suggests that employers’ use of redundancies remains strongly influenced
by expectations of short-run demand prospects and longer-term strategic
considerations.

A more severe downturn in the UK economy in the future might, therefore,
result in far more labour shedding than has occurred this time around.

By John Philpott, Chief economist of the Chartered Institute of Personnel
and Development

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