The cost of recovery

Although the US economy is showing signs of recovery, job numbers have lagged more than in other periods of economic recovery.

The Bush administration and the chairman of the Federal Reserve, Alan Greenspan, believe that the slowdown in job growth in the summer of 2004 and the knock-on effects were  temporary setbacks.

David Malpass, chief economist with global investment banking, securities trading and brokerage firm Bear Stearns, says: “We are in the early stages of a multi-year expansion characterised by solid US and global growth.” He sees an upbeat future, fuelled by falling unemployment, global growth and continued benefits from tax cuts.

But his colleague Francois Trahan, the company’s chief investment strategist, says: “Leading indicators of the economy will likely continue to lose momentum for the remainder of [2004] into 2005.”

UK employment rising
Professor John Philpott, chief economist of the Chartered Institute of Personnel and Development, forecasts that the prevailing economic climate in the UK will see a rise in employment of between 150,000 and 200,000.

He predicts that the record low levels of unemployment will ensure that even the moderate growth in employment that is forecast will increase pressure on an already tight labour market, leading  employers to adapt their people management practices to increase productivity in order to contain rising cost pressures.

Higher productivity will curb net job creation in the short run, but this trend may well be countered by greater job creation as employers tap new sources of labour supply, such as immigrant labour and the economically inactive – both of which have the capacity to limit wage pressures.

Philpott said: “Employers are having to work hard to prevent the tight labour market forcing up wages. With no sign of an easing in the labour market, better people management, bringing improved productivity, is the key to resisting upward pressure on wages. 

“Immigrant labour and efforts to get more people off long-term sickness absence and back to work also offer a safety valve, allowing continued growth in employment and output without forcing up wages and prices.

“Although the increase in employment in 2005 will be slower than in recent years, there is no sign of a contraction in the economy.”

Outsourcing fears
Recent surveys suggest US voters are more concerned that millions of jobs will be outsourced to India and China over the next few years than they are about the handling of the Iraq war.

Many more corporations are shopping around to identify where workers are cheapest and unions are weakest.

US analyst firm Forrester predicts that the number of US jobs outsourced offshore will grow to 3.3 million in 2015, compared to 315,000 in 2003.
Although UK offshoring is on a smaller scale, it is anticipated that the UK will follow similar trends.

The chancellor, Gordon Brown, anticipates that between 2 and 3 per cent of US and European service sector jobs will be outsourced by 2015.

NeoIT, a consulting firm that advises clients about offshore projects, foresees a “big year for offshore outsourcing growth in 2005″ and predicts that more than 80 per cent of Global 2,000 compnaies will have an offshore presence by the end of the year.

NeoIT said it sees increasing acceptance of offshoring as a foregone conclusion for multinational corporations that need to keep pace with global competition, supply and delivery models.

But it predicts that more than 40 per cent of offshore initiatives will not yield the anticipated savings, scale or risk diversification “due to buyer preparation and management, not supplier capability”.

Benefits and pensions
According to the Business Roundtable December 2004 CEO Economic Outlook Survey, US health-care costs are expected to increase 11.3 per cent in 2005, a slow-down compared with the 12.3 per cent increase in 2004.

US employees will, however, be lucky to see a 2 per cent increase in wages. The result of higher costs will be reductions in health benefits, salary increases and staff.

Employers, in an attempt to fix the situation, are turning to consumerism, employee education, wellness programmes and disease management programmes.

The increase in the rates is expected to affect employer plan design changes and the level of employee cost sharing.

“For years, health care costs have increased three to five times faster than the rate of inflation, and employers absorbed most of that cost,” said Susan R Meisinger, president and chief executive of US HR management firm SHRM. 

“Increasing health care costs are cutting into all areas of business, and that severely affects an organisation’s overall success and competitiveness,” she said.

“The economic ramifications of rising health care costs need to be viewed by what they cost companies in dollars that might be spent elsewhere.

“HR professionals have a unique position to report what their organisations are doing to keep up with health care costs. Fewer hires, more layoffs, and an increased cost of goods and services affect overall economic conditions in very real ways.”

With an ageing population in the UK putting considerable pressure on the NHS and resources for pensions, finding sufficient funds for 2005 is of grave concern.

Companies are being asked to develop pension benefit plans to increase employee contributions and discussions are under way to raise the retirement age in order to combat anticipated problems.

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