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Thursday, 27 October 2011

Companies have worries on the economy and their excess workforce… and start laying off personnel

One of the sad, but predictable results from the current recession is an increase in (mass) lay-offs among companies. In April I picked this up as a possible new trend:

It could be that these job cuts are the beginning of a more serious trend towards less employment. I wrote a number of columns mentioning the Part time Unemployment Benefit (PUB). This was a 50% government subsidy on salaries for companies to keep people employed that had too little work. In this way the companies could keep experienced personnel on the payroll until better days arrived.

What I had against this PUB is that companies that made use of it, missed the chance to become ‘lean and mean’ again. They gathered their personnel in the 2000’s:  while there was a situation of excess consumption in the USA and Europe, this also caused excess production. This excess consumption came to a sudden halt in the year 2008 in Europe and it is improbable that this excess consumption will return within a few years.  By keeping your personnel on an excess level, you run the risk of returning to red marks as soon as the economy chokes again.

Large consultancy firms, like Logica, Origin and Cap Gemini in The Netherlands, maintained a policy of lowering prices per hour for consultancy. These companies did this under pressure of the large banks and insurance companies. Contracts were bargained for large numbers of consultants and the discounts on the gross hourly rates were enormous. If you were not in on this, you were out!

The remaining rates were hardly sufficient to earn back fixed costs, but were still better than having 25% of the consultants without assignments. Although small consultancy firms sometimes had better deals, due to good personal relations of their consultants, also these firms had to give away 10-15% of their gross price.

The second, even more disturbing trend was: Consultancy assignments that became shorter and shorter. The number of assignments that had a duration of less than a month was soaring, while a duration in ´good times´ is often at least three months, especially in times when consultants are scarce.

The aforementioned trend of (mass) lay-offs is now sustaining, according to the Dutch implementing body for social security laws for workers, like the Unemployment Benefit.

Het Financieele Dagblad ( writes upon this developing story (link in Dutch):

Companies are ahead of recession, lay-offs increase

Implementing body for social security laws for workers UWV sees the number of resignations remain at much higher than expected levels. At the end of this year, companies may have applied resignations for more than 35,000 workers. That is about 16% more than the amount forecasted at the beginning of 2011. The organization adjusted its forecast, after the expected decrease of the number of resignations in the summer months, stayed out.

The organization earlier assumed that the number of resignations this year would drop to pre-crisis levels. The news of the UWV fits in a recent trend. 

The CBS stated lately that the unemployment is soaring currently. A substantial number of large companies – a.o. CSM (sugar and bakery products), Aegon (Insurances), Rabobank, KPN (telco), TomTom (navigation) and Philips (light, medical equipment and household appliances) announced intending to reduce the number of workers.

It is remarkable that the companies are front-running the forecast of a deteriorating economy. Normally unemployment lags economic development by about one year.

According to Hans Stegeman of Rabobank, the last recession of two years ago is still working its way through the labor market, while at the same time a possible new recession is calculated in.

´The last recession forced the government to restore its own budget. This is causing cutbacks and as a consequenc, a dropping number of jobs´, according to Stegeman. ´At the same time companies notice that the revival of the economy is stalling and export growth is stagnating. Companies are preparing for difficult times by cutting costs´.

According to the UWV, pre-crisis levels for resignations were 2000 per month. At the peak of the credit crisis, this number soared to 5000 per month. This dropped to 3000 per month at the end of 2010.

Although it is not satisfying to be right in this matter and I feel sorry for the people that are laid off, this is in itself not a bad development.

The part-time unemployment benefit halted companies in the operation of becoming ´lean and mean´ again, by reducing their production capacity and by laying off excess workers.

These excess workers remaining in their jobs painted a false image of a healthy economy in The Netherlands in 2010 and the beginning of 2011. And now, with the first economic headwinds ahead, companies raise the white flag and lay-off the people they should already have laid off in 2009.

This seems like a cruel measure, but it is better to lay off a few workers, than to go down with the whole company.

As the number of available workers will drop sharply in the near future, due to the coming retirement of the Dutch baby-boomers, the chance that these excess workers might find a new job soon is considerable.

That is the funny thing about the Dutch economy currently: although it is still in a depression that will last for a number of years, the coming retirement of the baby-boom generation means that workers might become scarce anyway.
However, the chance that this will lead to a price /wage spiral is very slim, in my opinion.

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