HOW TO RECOGNIZE THE COMING EMPLOYMENT RECOVERY
A Right Recruiting newsletter, June 2009
From here, it looks like most area businesses have either stabilized or are improving. Last year’s fear has ebbed and has been replaced by relief and cautious optimism. It’s time to look to the future.
In past recessions, noticeable employment gains have lagged the general economic recovery by about 6 months to a year. Also, in past recoveries, the professional employment market has usually tightened sooner than the general numbers reported in the media. That discrepancy can create a disconnect between market perception (soft) and market reality (tight). In other words, by the time CNN tells you that jobs are more plentiful, the market for degreed skilled business and technical professionals has already improved. That’s been the case in every recession I have seen since 1979. But will it be true now? In this newsletter, I will explain why this recession is different and what that may mean for your career or for your hiring plans. Getting caught flat-footed can cause a major setback to your personal or business plans. Since my firm looks at employment as a market, it may be helpful for both candidates and companies to have an accurate view so they can correctly assess their strategies moving forward.
First, two caveats. One, employment markets are local. I am specifically speaking of the Right Recruiting geographical market – a 2 hour circle around Philadelphia. Whether the employment markets in California, Michigan or Florida are different is meaningless in this context. Two, we are talking about the market for degreed engineers and professionals and not for general labor. The specificity of many skill sets often create shortages unseen by those who focus on general numbers.
Obviously there are two components to every market, supply (active candidates) and demand (active employers). A tight market means that supply (candidates) is limited and a loose market indicates the opposite. In a loose market there are more people looking for work than companies that are hiring. Our research for this article began by evaluating the supply of candidates. We used internal metrics that have given us market data for years. They quantify ad response and resumes posted on-line. To analyze on-line postings we used the same search criteria we have always used so as not to corrupt the numbers. The last step in the process is to determine whether the job seeker or resume poster is employed or not.
It’s important to remember that the supply of candidates is composed of two different types of people, those who are out of work and those who are employed but who are seeking a better opportunity. The motivations of the second group can vary and can include location, salary, advancement or personal issues. The common denominator is that all people in the second category are in the market voluntarily. The first group, the unemployed, have entered the market involuntarily, of course.
I looked at data from January 2009 through May 2009 and compared it to every year going back to 2003. That covers downturns, recoveries and growth periods - basically all parts of the cycle. Since a lot of hiring is seasonal, I thought it made sense to stay consistent and use the same months every year. I think this provided us with a good snapshot of the supply in our market. It should be able to tell us whether there are more of less people in the market this year that at any time over the last 6 years.
To evaluate the demand side of the market, we used the same on-line search of job criteria that we have always used and stayed consistent with our supply analysis. We added another metric - the percentage of response to various e-mails we send to companies about specific candidates. I think that’s a nuanced gauge of hiring and shows latent company participation in the market. A market in which 100 emails about specific candidate availability returns 20 comments/questions from managers is hotter that one which only brings back 5 comments/questions, for example. Between those two metrics we have a gauge of hiring intensity and a measure that allows us to compare demand from year to year.
First, I will let you know what that analysis tells us about the market now. Second, I hope to extrapolate from that and let you know what to expect moving forward.
A SNAPSHOT OF TODAY’S MARKET
Candidate Supply
Let’s first discuss supply. You probably assume that the supply of candidates is greater than at any time in the past 6 years. After all, unemployment is higher. Well, surprisingly, our research tells us that the supply of candidates has not grown much in the past year. In fact, my metrics show that there were more people in the market in both 2008 and 2007 than there are now. In 2005 and 2006 there were fewer candidates than now but in 2003 and 2004 there were many, many more.
How can that be? A closer look at the data gives us a clue. Right now, 95% of candidates are unemployed. Only 5% are employed. Usually, that ratio is more like 50/50. Clearly, there are now more people looking for work because of layoffs but that has been balanced by those who are employed and who have removed themselves from the market. Very few employed people are seeking better opportunities. They are either too nervous to look for a new job or don’t believe that any good opportunities exist for them now. The end result is that there has been no appreciable increase in the supply of degreed, professional and technical candidates for jobs in our region. I’ve heard anecdotes from companies that say that they get 200 responses from ads and are overwhelmed by applicants. Well, those stories can be deceptive. That can deceive in two ways. Is a person in Phoenix answering an ad for a Philly job that does not pay relo really a candidate? I think that’s a stretch. After all, the company won’t consider interviewing or hiring the person anyway. Also, it is obvious to us is that people send out multiple resumes. Some of the company’s respondents are answering every ad posted, no matter what the job is. At an extreme, it’s the same 200 people answering every ad. I see it myself. I can run 3 different ads for 3 different jobs. Half of my response will be from people who are responding to all three ads, irrespective of the different skills required. This is not meant to criticize those who are aggressively seeking employment. This is just a point of explanation and an analysis of claims of “high-volume” ad response.
The fact of the matter is that we have not had a high level of local layoffs. If you remember 2003, we were still in the depths of the telecomm and Internet explosion. Companies weren’t just laying off a few people; they were literally going out of business or laying off thousands. For the most part, the layoffs we’ve seen locally have been selective. Rather than a company or industry being decimated, like Lucent/Agere in 2003, for example, we’ve had a broader but shallower series of layoffs. We are not a major automotive center and our construction industry has always been a follower of the local economy and not a driver like in Phoenix. The diversity of the local economy has acted, once again, like a cushion.
But, for those laid off, this has still been painful. Many tell me of responding to ads for months with few call backs, interviews or prospects. If the supply of candidates has not swelled why aren’t they getting jobs?
Employer Demand
This leads us to an analysis of the other side of the market – demand. All of our metrics point to a collapse in hiring across all industries. This is highly unusual. In a normal economy, about 75% of employers will be seeking skilled professionals for some areas of the company. In other words, most are active in the market. In past recessions, about 20% of companies remained active in the market. There has always been at least one industry segment growing and hiring in all past recessions. In 1982 it was oil/gas. In 1991 it was electronics. In 2001-2003 it was medical and pharma products. This is the first recession that I’ve seen that has affected everyone. I would estimate that right now only 5% of local firms are active in the market. Of the rest, even if they have not laid off, they are not hiring.
This makes sense to me. After all, this was a recession driven by credit problems. Credit is the lifeblood of most companies and a potential lack of credit is what drove almost all employers and industries to freeze hiring and to consider temporary retrenchment. While of course there are micro-currents affecting different companies and industries, the macro-environment was driven by last years credit concerns. I think that goes a long way to explaining the uniqueness of the lack of employer participation in the market.
FEARLESS PREDICTION SECTION
If the evaluation of very weak demand with a minor increase in candidate supply is correct, what does that mean moving forward? What should both candidates and companies expect from the market in 2009/2010?
I think I can safely predict that demand will eventually pick up. The hard part is to predict when it will pick up. My guess is that the 3rd and 4th quarters of 2009 will each show a higher level of employer participation in the market so that by early 2010 the level of demand for local professional employees will have recovered. This can happen either sooner or later but it will happen. The whole reason for being in business is to grow. If you don’t, your competitor will. Growth requires the addition of skills into an organization. In other words, at some point most businesses will realize that to survive they will need to add staff.
While the timing of the local jobs recovery might be a mystery, it’s content is very clear. It will be instantaneous and not gradual. We can plug our knowledge of past recoveries into our analysis of the existing market to get a picture of how the market will change.
Usually, market recoveries sneak up on people. It seems that one day CNN reports about layoffs and a day later a switch flips and the new story is about a shortage of skilled workers. For those who live and breathe in the market, like Right Recruiting, there has always been an earlier recognition of shortages of skilled people. A normal recovery looks like this ...
Acme Manufacturing, a fictional employer, has seen it’s business improve and wants to add to it’s professional team. They assume that there is an abundance of candidates and create very tight specs with a limited salary range. Since they think they are one of the few companies hiring they will have the pick of the market. There will be no need to compromise nor will there be a need to move quickly on any candidate.
This is their first mistake. In a recovery, every company wrongly assumes that they are the only employer whose business has improved. Think about that – is it really a logical assumption? It’s more likely that Acme’s competitor’s backlog has also improved, as well as it’s vendors and clients. No business is an island. Everyone is part of a supply chain and any assumption that your business conditions are unique is usually false.
But, usually the HR person or manager in charge of hiring has strong anecdotal evidence that there is an oversupply of unemployed candidates. They have friends and contacts that’ve been out of work for months. They believe that a perceived oversupply will surely provide an abundance of top-flight people to consider. Perhaps not. As a perverse function of markets, usually the two markets that are the last to recover are the HR market and the manager market, the two market subsets that are providing the anecdotal evidence. Those two market subsets require a sustained level of corporate growth and, while general business conditions have improved, it often takes a year or two to filter into a noticeable improvement in the HR and mid-level manager markets. Anecdotal evidence can send false signals depending on the relevance of the anecdote.
Acme is entering the market with both faulty macro and micro assumptions. There are more competing demand participants than it thinks and the assumed over-supply of candidates is more mythical than real. It’s at this point that everyone, HR, manager and candidates, all get angry at each other.
Here is a typical scenario. Acme interviews 8 people over two months and wants to bring 3 back for second interviews. One of the 3 has taken another job but, no worries; they still have two good people. After taking a week to interview the 2 finalists, a week later they call one with a weak offer. The person has been unemployed for 3 months. Alas, he has just gotten another offer for $5,000 more and will accept that job instead. Once again, no worries, since the backup candidate was also good and an offer is extended. While the backup candidate is glad to have an offer, she has 3 other interviews scheduled for the next 2 weeks and will let Acme know after that. Since Acme took 10 weeks to get to this point, she feels entitled to 2 weeks to consider other options.
Acme’s in an ugly place now. They have invested 10 weeks in a process with no results. The blame game begins between HR and the manager. If the last candidate turns down the job they will have to restart the process in a noticeably tighter market. Oops. That’s how quickly things change.
For the candidates who participated in the process, it was a very frustrating experience. Once again, Acme’s faulty assumptions have created a problem. The pace of the process was glacial and, to an unemployed candidate, a complacent interview process is particularly painful. Please note that in this scenario, candidates who had been out of work for months had all received multiple offers within a short period of time. Why? Because businesses improve as a group, not individually. For most candidates, a recovery is the period when, after months of silence, everyone wants to speak with them at once. It’s a very strange time for all concerned.
Will this be the same? All factors lead me to say yes, emphatically yes. Here is why:
1) This is the only recession to have been felt by every company and industry simultaneously. Wouldn’t it be natural for all to recover simultaneously, validating my John Donne quote that “No company is an island.”?
2) If our analysis is correct and the problem is weak demand and not candidate over-supply, any uptick in demand will be immediately felt. In other words, even a small general improvement in hiring may tighten the market significantly.
3) Employed candidates will stay off the market for longer than usual. Why? Because a secondary uniqueness to this recession is that it is also a media depression. The market for journalists is very, very weak so news reports will continually emphasize the lack of jobs. This will keep ambitious but employed people out of the market because they will be ignorant of the fact that their personal skill set is in short supply. Journalists will report bad news because; to them personally, it’s still a bad market.
4) We haven’t felt the effect of stimulus money yet. There is a chance that federal spending may not hit the economy until a recovery has already begun. If that happens it will be like a shot of adrenaline, but to a healthy person instead of to a sick person. It may turbo-charge hiring. Of course whether the stimulus in general is a good thing is a topic for another venue.
5) Supply chain methodologies have amplified swings in production, both up and down. The speed with which industry reacted to this recession was unprecedented and inventory levels have dropped precipitously. Once again, any increase in demand should translate to a quick recovery.
The good news is that I think that my view of what the recovery will look like will prove correct. I think I’ve described it correctly. The bad news is that there is no way to predict when it will happen. While things have indeed improved, to badly quote Winston Churchill, “This may not be the beginning of the end but it may be the end of the beginning.” Things have definitely bottomed out and there is some improvement but we need to get to a tipping point before the economy starts growing on it’s own momentum. To me, my money is on the 3rd quarter. If I am right, the summer and post-Labor Day period should see an increase in ads and activity. If I am wrong, we will see the same chain of events described above but perhaps not till 1st quarter 2010. The local job market recovery will be almost immediately noticeable. It can happen in July, September, November or January. The timing is a guess but when it occurs, it will be obvious to all parties in the market.
For us, this has been a good time to get to meet new companies and people. We’ve been invited to visit with some local employers on a “get to know each other” premise in anticipation of a future business relation. That process has been a lot of fun and very educational for us. I appreciate the time and investment that those we’ve met have made in their future.
As ever, thanks for reading this far and please try to remember Right Recruiting for all your employment needs.
Jeff Zinser