WASHINGTON – The American economy continues to stumble. It’s creating jobs at a goodly clip, but other aspects of growth are less impressive. Business investment has been lackluster. The housing recovery is improving but remains short of where many economists thought it would be. Consumer spending, representing slightly more than two-thirds of total spending, has been soft. The economy has a tentative quality that repeatedly disappoints forecasts of stronger growth.
My main explanation for this — as I’ve argued before — is the hangover from the 2008-09 financial crisis and the Great Recession. These events changed economic psychology, precisely because they were unanticipated and horrific. They transcended the experience of most Americans (that is, anyone who hadn’t lived through the Great Depression). Corporate executives and consumers alike became more defensive; they saved and hoarded a bit more. If a novel calamity struck once, it could strike again. They’d better prepare.
But this shift in climate isn’t all that’s happening. It’s reinforced by widespread business practices. In economics jargon, many companies are striving to convert “fixed costs” — money they have to pay — to “variable costs,” money they can pay or not, depending on their needs. Companies seek more flexibility, which is good for them. The downside is that their “flexibility” becomes workers’ “insecurity,” which is bad for them.
Consider two common forms of this. One is the growing reliance on temporary workers. Superficially, this seems trivial. Temporary workers now account for only 2 percent of the U.S. workforce, and though that’s up from about 1 percent in 1990, it still seems too small to matter. But appearances are deceiving.
Companies have changed how they view temporary workers, says economist Susan Houseman of the W.E. Upjohn Institute, a research group. For decades after World War II, “temps,” mostly women, served as substitutes for office workers who were sick, on vacation or on leave. Now, companies see temporary workers as a way of improving financial performance by better navigating the business cycle. Roughly half are involved in manufacturing and warehousing; about one in six are professional or technical employees (accountants, IT workers, lawyers).
Businesses “want to have a just-in-time workforce,” says Houseman. “You don’t want to pay for people when you don’t need them.” As a result, temps represented an outsized share of job swings in both the recession and the recovery. In a study, Houseman and Carolyn Heinrich of the University of Texas found that temps accounted for 11 percent of the recession’s job loss (from late 2007 to mid-2009) and 13 percent of the recovery’s job gain, through 2014.
Temps can also reduce a firm’s labor costs, mostly because they have skimpy, or nonexistent, health and pension benefits, reports the study. (Temp workers remain on the books of the recruiting firm — companies such as Manpower — and so aren’t covered by the fringe benefits of the hiring company.) The advantage for workers is simple: They have a job that sometimes leads to a permanent position, in about 15 percent of cases over five years, says Houseman.
A second way that firms expand variable costs involves pay practices. In our mind’s eye, we imagine that most workers have a base salary or wage rate that is periodically increased. Firms consider labor costs fixed — unless they fire workers. But that’s changing, reports Aon Hewitt, a consulting firm.
In a survey of 1,064 large and medium-sized firms, it found that many had shifted most funds for annual increases for salaried workers into a variety of one-time payments: profit-sharing, personal incentive plans and bonuses. Labor costs become more variable. These payments don’t go into workers’ base pay and, depending on how well or poorly the firm is doing, can be raised or reduced annually. They can also be channeled to favored employees.
“This is a way to pay for performance … but not to get stuck with fixed costs,” says Ken Abosch of Aon Hewitt. He calls the de-emphasis of across-the-board wage and salary increases “a quiet revolution” in compensation practices dating to the 1980s. But for workers, the shift elevates uncertainty. They can’t tell in advance precisely what their annual pay will be. They become more tentative.
What we seem to have is an economy caught in a vicious circle of its own fear and ignorance. The financial crisis and Great Recession have left a thick residue of anxiety. Companies and consumers responded by restraining spending, which (of course) weakened the recovery. The efforts of firms to protect themselves from this weakness in turn shifted risk onto consumers, making them more cautious. They aren’t terrified, but they aren’t exuberant either.
With time, we may regard this process as the rediscovery of prudence. But for now, it feeds continuing frustration.
© 2015, Washington Post Writers Group