One Ambivalent Economy + Many Cautious Employers = One Difficult Job Market

For those looking for work these days, job security may be a stubbornly elusive goal.

More than seven million jobs have been lost during this recession, and so far, few have come back. When jobs do return, say experts, many will be temporary, contract or short-term. Risk-averse employers seeking cost savings and flexibility will outsource whatever they can to smaller firms or independent contractors before hiring full-time employees. That means job seekers will have to be more flexible, willing to take short-term assignments or relocate to places where jobs are plentiful. In the days ahead, fewer Americans will be hired by large corporations, and more will have to work at small companies, in guilds of contractors or through self-employment.

In many respects, none of these changes are new.

“The future looks like the past only more so,” says Wharton management professor Peter Cappelli. “What happens as a result of these big downturns is that the trends already underway just get speeded up.” For example, the percentage of the labor force over 55 years old has grown in the past few years as the baby boom generation aged and decided to work longer. The financial crisis magnified that trend as more boomers delayed retirement in response to their plummeting 401(k)s. In other cases, companies that were planning to trim workers did so quickly instead of gradually. Sectors that were already shrinking shrunk faster. More jobs moved overseas. Ailing businesses failed instead of hanging on.

For job seekers, it won’t be easy to figure out where to go next. In its 10-year employment outlook, The U.S. Bureau of Labor Statistics projects that 96% of job growth between now and 2018 will come from service-providing industries, the top sectors being professional and business services and health care and social assistance. Cappelli says such long-term projections aren’t worth much to job seekers, however, because people adapt to them the same way investors react to a stock tip — by flooding the market. “Everyone says there are jobs in health care, but nursing schools have been at capacity for quite a while,” Cappelli notes. Likewise, the financial and construction industries are in the doldrums now, but when they recover, they might roar back. “Things flip around as quickly [in the job market] as in the investment industry, but individuals can’t flip their careers around so quickly,” he adds.

Undergoing a “jobless recovery” isn’t new, according to Francis X. Diebold, an economics, finance and statistics professor at the University of Pennsylvania, who notes that the last three recessions fit this definition, while earlier ones didn’t. “Before 1990, what you saw was really, really brisk growth coming out of recessions. The recession ended [and] employers frantically hired people back. Since 1990, the pattern is very different. It’s much more gradual and takes longer to complete.” Diebold, who is also co-director of the Wharton Financial Institutions Center, attributes the change to technological innovation that allows employers to be more productive with fewer workers. “Employers can afford to wait because they can do things with capital instead of labor.” Not until they are absolutely certain the recession is over will employers start hiring again.

Two years after the financial crisis crippled the global economy, unemployment remains stuck at 10% in the U.S. and much of Europe. According to the Labor Department, 15.3 million Americans were unemployed in December, 9.2 million were working part-time because they couldn’t find a full-time job, and close to a million discouraged workers had stopped looking for employment altogether. Four out of 10 unemployed workers say they have been looking for 27 weeks or more. The Obama administration has pledged to make jobs a priority in 2010, but economists still say it could be six months to a year before hiring picks up. The Congressional Budget Office in January predicted that unemployment wouldn’t return to its pre-recession level of 5% until the middle of the decade.

Based on real-time measurements developed by Diebold and produced by the Federal Reserve Bank of Philadelphia, the recession ended sometime during the summer of 2009. But there hasn’t been a robust recovery. The economy “looks kind of ambivalent…. It just can’t find the energy to burst into clear and vibrant positive territory,” Diebold says. “I will be looking as we move into the middle of this year to see if employment comes back, but remember, anything can happen. There could be a double-dip — a second recession…. If we plunge into a second recession, that could change everything.”

An Army of Ants

The economic uncertainty has kept employers on the fence about hiring, according to a recent survey by Towers Watson, a global professional services and human resource consulting firm. Despite signs of recovery, 31% of employers polled in October said they plan to reduce head count in 2010, and 6% said they planned “a significant reduction” in staff. On the bright side, 21% of companies surveyed said they planned to increase hiring in 2010, compared to only 3% of companies that hired workers in 2009.

Companies have become risk-averse in the face of ongoing economic uncertainty, and are trying to maintain as much flexibility as possible, says Ravin Jesuthasan, a global practice leader at Towers Watson. Companies are also focusing on optimizing resources, which often translates into outsourcing work, giving it to contractors or hiring someone part-time. “Our sense is that we’re not going to get back to the mix of jobs that we saw prior to this recession…. Employers are going to go through all the contingent options they have before hiring a full-time employee. This focus on cost and risk is going to give us a networked organization…. You will see a lot of companies asking, ‘What are we going to have to keep that is core?’”

For large companies, the answer probably won’t include many full-time positions for college graduates. “My studies show that year after year after year, large employers aren’t adding jobs; they’re just replacing jobs,” says Phillip Gardner, director of the Collegiate Employment Research Institute at Michigan State University. “The most buoyant part, the most consistently positive part of college hiring has been small employers.” According to the Institute’s latest Recruiting Trends survey, large companies (those with more than 4,000 employees) plan to decrease hiring by 3% in 2010, and mid-sized companies (those with 500 to 4,000 employees) expect to decrease hiring by 11%. However, small companies (with 100 to 499 employees) expect to increase hiring by 15%, and fast-growth companies (from 9 to 100 people) by 26%. These companies span a range of sectors. If small companies are able to get enough credit to keep business going, they could drive job recovery, Gardner says. “We don’t have any white knight sector out there like we have had in past recessions. This is going to be an army of ants — small diverse companies requiring college graduates. They are going to pop up all over the place.”

Longer-term, Gardner sees a wave of job openings when baby boomers retire, but the recession has temporarily delayed that natural flow. Federal and state governments, petroleum and chemical companies, utilities, railroads and higher education are all sectors heavily populated with workers over 50 years old, Gardner points out. When the economy recovers and boomers feel comfortable enough to leave the workforce, generations of underemployed college grads and frustrated older workers will flood into open posts. He predicts “a period of real chaos. I think you will see a longer jobless recovery than we’ve ever experienced, and then when it does kick off, it’s going to be sudden, with just a crush of activity, with the head not knowing what the tail is doing at all.”

In the meantime, job seekers are taking what they can get, even if it’s temporary. Patricia Rose, director of career services at the University of Pennsylvania, notes that 3% of the university’s 2009 graduating class took internships, temporary positions or part-time jobs that weren’t guaranteed to continue, up from 1% in 2008. Rose believes students have shown more interest in fellowships and short-term opportunities, such as Teach For America, in part because they want a meaningful experience, in part because can’t find traditional full-time jobs. Short-term jobs “were not created in response to the recession, but they have become more attractive during the recession because students are considering more options,” Rose says.

At Wharton, some MBA students are also shifting focus, with many trying to figure out how to make their own fortune. Attendance at career events related to investment banking has dwindled, while interest in the much broader “diversified financial services” has soared. There has also been high demand for information on entrepreneurship, says Michelle A. Antonio, Wharton’s director of MBA career management. “It would appear from our end that there is a continued uptick in students interested in starting their own business…. This [does not seem to be] a short-term trend.”

A New ‘Wild West’

A small number of job seekers might decide to go global, temporarily seeking work in countries, like India and China, where growth is expected to remain high. The International Monetary Fund predicts that growth in “advanced countries,” such as the U.S., Great Britain and Japan as well as Europe, is expected to average 2.1% this year and 2.4% in 2011, while China’s growth rate will be around 10% and India’s close to 8% both years. “The relative rates of economic growth will certainly draw people to China,” says Wharton management professor Marshall Meyer. “Job-seekers are going to go look for excitement on the frontier. It’s the new version of ‘Go West, young fella!’ There’s a feeling that the momentum is in Asia, not in the U.S.”

To be sure, China is likely to keep draining manufacturing jobs from the U.S. and Europe, Meyer notes. And skeptics argue that managerial jobs for expats in Asia will dwindle as more educated Indian and Chinese nationals step up to run their own call centers and factories.

On the other hand, Towers Watson’s Jesuthasan speculates that job flow could eventually reverse if Asian economies keep growing while the U.S. stagnates. “What you see is these emerging economies very quickly closing the wage gap with the United States. That closing gap is going to be something to watch over the next five to 10 years.”

It’s too soon to say whether the shift to more independent and short-term work is permanent, cautions Wharton management professor Matthew Bidwell, who studies independent contracting and temporary labor. “Usually at the end of a downturn, temporary help and contract work is one of the first things to come up. Temporary numbers are already growing, [but] it’s hard to know whether that’s a shift towards jobs of the future.” Temporary and contract work may look good on paper, but eventually companies maintaining temporary employees run into logistical and legal issues. Likewise, the shift to self-employment may also be temporary, according to Bidwell. A study he did on technology contractors found that after contracting for a few months or a couple of years, most went back to full-time work. “That’s a common response to getting laid off, going into contracting or self-employment. People kind of seize this as an opportunity…. To what extent that is people carving out a new career, and to what extent it is people stringing together jobs, is difficult to say.”

Others see the shift towards independent, project-based work as a permanent change in how people approach career and life. Practice professor of management Stewart D. Friedman, believes the recession has simply accelerated questions people were already asking themselves about making work more manageable and meaningful. Before the crisis, people were experimenting with new models of employment, pushing traditional boundaries in terms of hours, location and methods of communication. The economic crisis has “jolted people into thinking, ‘Why am I doing what I’m doing?’” Friedman says.

Some are deciding they would rather start their own company than work for someone else. For both “intelligent new entrants and people who have been displaced, it’s created an opportunity for this kind of thinking,” Friedman suggests. “It’s like [the aftermath of] an earthquake: You start thinking, ‘How do we start building structures that are secure?’ The economic crisis has forced some people to think, ‘Where can I create security and a path forward that makes sense to me?’…. People want to have a greater sense of control.”

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