One counterintuitive result of a recession is that workers are under more pressure — much to the delight of employers.
By any estimate, the Great Recession was indeed great. No recession since the Great Depression has have the same kind of toll on the social and economic fabric of the United States as this recent one. Per analysis from the Federal Reserve Bank of Minneapolis, this recession has been the longest period of economic contraction since 1933. Gross domestic product fell by 5 percent at its lowest point and non-farm employment by 6.3 percent, while the labor force participation rate (the percentage of Americans working or actively looking for a job) fell from 66 percent in December 2007 to 63.2 percent in August 2013, with a restoral to pre-recession employment numbers not expected until Spring 2015 — an unprecedented seven years after the job losses started.
In this extended period of unemployment — despite high levels of business productivity and record market profits — lies a disconnect that has the potential to disrupt job security and expose to mistreatment of the most vulnerable within the workforce.
Recently, the nature of the nation’s economic recovery has been called into question. While the stock markets are regularly breaking records and the wealthiest Americans have significantly improved their financial posture — with the top 1 percent seeing an income boost of more than 11 percent — recent research, such as a February economic study from the University of California-Berkeley, shows that the income of the bottom 99 percent actually dropped 0.4 percent during the recovery period.
Emmanuel Saez, a researcher at UC-Berkeley, concluded that “the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s.”
Despite the slow growth in job creation and the pay stagnation, something wholly illogical has happened: the nation’s productivity has spiked. According to the United States Bureau of Labor Statistics, the latest reporting shows an output increase from the nonfarm business sector of 3.7 percent for second quarter 2013, while the number of hours worked for all persons only increased 1.4 percent. In the manufacturing sector, output dropped 0.6 percent, while hours worked of all persons dropped 2.4 percent.
What this correlation represents is an unusual facet of recession economics: when times are bad, productivity goes up. Productivity is defined as the amount of work done by a company or industry divided by the number of hours reported to do that work. Typically, in times of economic hardship, companies reduce their workforce to balance their books. The remaining workers tend to find themselves pressured — explicitly and implicitly — to maintain the same level of output with fewer people working. Out of concern for losing their jobs or through the motivation to meet established goals, the average worker works harder and for longer under recession conditions.
This creates a situation in which employers are seeing productivity goals being met with fewer workers, which further encourages less hiring.
The “unemployment conundrum”
“We find that worker effort is directly related to local unemployment rates,” wrote Edward Lazear, co-author of the National Bureau of Economic Research working paper “Making Do With Less: Working Harder During Recessions,” for Investor’s Business Daily. “Studying a multi-location service company where detailed measures of productivity are available, it is found that establishments located where there was high unemployment enjoyed significantly higher productivity than in areas where there was low unemployment. In fact, about two-thirds of the increase in productivity that occurred in this firm during the recession could be attributed to the additional effort that resulted from the higher unemployment rate of 2007-2009.”
“High unemployment makes workers more determined to keep the jobs that they have, and they enhance their chances of remaining employed by working harder,” Lazear continued. “This means fewer new hires.”
“What is fascinating about this study is that the increase in productivity that occurred during the last recession is a consequence of making do with less — the quality of the workforce at the firm we study hardly changed,” said Christopher Stanton, a co-author of the study. “This is evidence that in areas where unemployment is high, workers are responding to the reduced likelihood of obtaining an alternative job and, therefore, working harder to keep the one they have.”
According to a 2011 survey of more than 300 North American companies, two-thirds of all employees reported working longer hours than they did three years prior. One-third reported taking less vacation or personal time off. Nearly one-half of all employers recognized that the demand for greater productivity is disrupting the employees’ work-life balance and may be contributing to an unhealthy situation.
While many businesses are not hiring due to uncertainty about the economics — particularly in light of the political flux surrounding implementation of the Affordable Care Act — others are not hiring because they don’t have to. An example of this occurred in April, when over 6,000 Dollar Tree employees filed suit against the company on the claim that the company routinely made employees work “off the clock.”
The suit, filed in the United States District Court in Norfolk, Va., stated that “In an effort to provide low-cost merchandise to its customers and still maximize profits, defendant Dollar Tree has engaged in a policy, pattern or practice of requiring its thousands of hourly associates and assistant managers to work without pay, in several ways.” The workers claimed that Dollar Tree — the nation’s largest dollar-or-less retailer — often forced continued work through unpaid lunch breaks, despite being “off the clock.” Most workers reported, in addition, being forced to work 30 to 45 minutes over their shifts daily unpaid.
According to Dollar General’s most recent annual report, the company has eight pending lawsuits against it, including four federal wage-and-hour violations. If the class is certified, as many as 275,000 current and former workers since 2009 could join the suit.
These types of abuses seem to be endemic. It has been estimated that Walmart is the defendant in 5,000 lawsuits per year on average, most of which deal with alleged wage theft. A recent example is the case of Schneider Logistics — in which Walmart is their sole customer — that has been accused in a January lawsuit of cheating as many as 1,800 workers out of millions of dollars. It was alleged that Schneider and two staffing agencies failed to keep proper payroll records, falsified time sheets and misled employees on their earned payroll.
Teamsters for a Democratic Union has reported that the International Brotherhood of Teamsters has won a number of wage theft cases, including a settlement for 4,000 Illinois UPS drivers to receive $7.25 million in back pay, an affirmation by the New Jersey Supreme Court of a lower court decision that route drivers were not sales personnel and therefore were entitled to overtime pay, a $3 million settlement with Taco Bell for “off-the-clock” work by employees in Washington State and a $3.1 million judgment against Tyson/IBP for not paying for pre-production and post-production work.
Susceptibility of low-income workers
Those most unlikely to find replacement work in a tight job market — the under-educated, the unskilled and workers in high unemployment areas — tend to be exploited the most, as they have the most to fear from unemployment. Those working develops a sense of gratitude for the work they have, which manifest as a fear of termination and a drive to meet or exceed expectations. Goals are being met with fewer people, so hiring slows, which re-enforces the fear of not finding a new job if terminated.
“An increase in the unemployment rate makes finding an alternative job more difficult, which reduces the relative cost of effort,” said Stanton. It’s possible that less productive workers are most responsive to recessions and increases in local unemployment rates because their alternatives diminish the most during weak economic times.”
With 21 states not expected to reach full employment until at least 2015, and three — Nevada, Michigan and Rhode Island — which will not see full recovery until at least 2018, per analysis from IHS Global Insights, the dangers of all of this are real. Without full employment, income will stay stagnant or may even drop in light of employment demand, while the number of wage-and-hour violations will continue to increase.
The recovery for the middle class cannot happen until competition for employees forces wages to rise and this cannot happen until hiring thaws. This will ultimately require a commitment from the government and from the nation’s wealth-holders toward making investments that both create jobs and increase demand for American goods and services.
“Productivity growth is essential to ensure that the American worker’s standard of living will be higher in the future than it is today,” wrote Lazear. “At the same time, we suffer a double whammy from high unemployment. Not only does unemployment mean that fewer are working, but those with jobs work harder and crowd out employment opportunities for others. We need to both improve productivity growth, which although positive still lags normal rates, while at the same time increase employment.”