As the unemployment rate remains near a half-century low and the economy faces challenges such as a slowing economy and rising interest rates, there has been speculation as to why companies have not laid off more workers. Some suggest that companies are engaging in “labor hoarding” – keeping employees on board even when there is not enough work to justify it. However, Eugenio Aleman, chief economist of Raymond James in St. Petersburg, Florida, is deeply skeptical of this argument.

Aleman argues that it doesn’t make financial sense for companies to retain workers who are not productive. In fact, labor accounts for up to 70% of their total costs, so if there is insufficient demand for their goods and services, businesses would either see their profits decrease or start losing money. Having owned a family-run Argentinian grill restaurant in Puerto Rico, Aleman speaks from personal experience: “If business is down, the first thing you do to reduce costs is to fire your workers.”

Moreover, Aleman questions the logic behind hoarding workers in anticipation of a recession. If a company knows that a recession is imminent, it would only exacerbate the situation to keep unnecessary employees when things are bound to get worse in the future.

In fact, Aleman is among several Wall Street economists who believe that a recession is likely due to the rising interest rates enacted by the Federal Reserve to combat high inflation. He emphasizes that presenting oneself as a company that engages in labor hoarding would not bode well with investors: “If you tell Wall Street you are hoarding workers, you will get punished by investors.”

With the scarcity of talent in today’s labor market, it is understandable that companies may be hesitant to let go of their employees. However, Aleman’s perspective challenges the notion of labor hoarding and raises questions about its feasibility and purpose in an uncertain economic climate.

Retaining Employees: A Costly Decision or a Prudent Strategy?

It appears that in times of economic uncertainty, companies are increasingly willing to part ways with their employees. Recent indicators, such as a slight rise in jobless claims and a decline in job openings compared to last year’s high, suggest that businesses are not as hesitant as they once were to let go of their workforce.

However, it is important to acknowledge that not all businesses share the same approach. Some companies are more inclined to retain their workers as long as possible, particularly if they believe that the economy will rebound in the near future. They weigh the potential higher costs of retraining new employees against the benefit of keeping experienced staff onboard.

Manufacturers, in particular, are cautious about releasing employees due to the persistent shortage of skilled blue-collar workers. This scarcity makes it even more crucial for them to hold onto their existing workforce.

Nevertheless, most firms recognize that reducing costs is essential when faced with declining sales. As one expert aptly stated, “You can’t fire a machine. You pay for the lifetime of it and have to keep it.” Therefore, businesses must explore alternative measures to cut expenses.

Surprisingly, there are few companies and executives who openly admit to retaining idle workers on their payrolls. Economically speaking, this decision may seem illogical and even detrimental to a business. Disclosing such practices to Wall Street investors can incur severe punishment.

However, if labor hoarding isn’t the explanation for the remarkably low U.S. unemployment rate and near-record low layoffs, what is? The answer may lie in the stability of the economy itself.

Despite experiencing a slowdown over the past year with the impact of significantly higher interest rates, the American economy continues to grow steadily. This observation is further supported by anecdotes, such as local establishments like “My corner sports bar” reopening on previously slower days of the week.

In conclusion, the decision to retain employees during challenging times involves careful consideration. While some companies are more willing to let go of workers, the shortage of skilled blue-collar professionals prompts many manufacturers to hold onto their existing workforce. Nonetheless, businesses must find alternative methods of cost reduction. Although few openly admit to retaining idle workers, the stable economy plays a significant role in maintaining the low unemployment rate and reduced layoffs observed in recent times.

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