With the economy slowing for months, you’d think there’d be more layoffs. But layoff activity remains very low.

What gives?

Well, we may be witnessing “labor hoarding” on the part of employers.

I speculated on this in a July 6 newsletter to paid subscribers (link):

So what explains the current reluctance to shed workers?

Maybe recent experience has something to do with it.

Much of the ongoing economic recovery has come with persistent labor shortages. Employers haven’t been able to hire fast enough to keep up with the booming demand for their goods and services.

At least some of the employers seeing business slow right now remember how hard it was to recruit talent over the past two years and would rather just hang on to employees, even if it comes with carrying costs.

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By the way, laying people off isn’t necessarily cheap. Many employers continue to pay salaries and provide benefits for weeks or months after laying off employees. And hiring isn’t cheap, either. Employers have to spend a lot of time and resources to recruit and train new employees.

In the long run, it may be cheaper to just hang on to employees during this lean period.

I’m not claiming to have coined this idea. Diane Swonk, Aaron Sojourner, and Jason Furman are among a handful of economists who’ve been kicking around this idea on Twitter in recent months.

After the July JOLTS report released last week showed layoffs remained stubbornly low, I asked folks on Twitter: “Anyone hearing anything about labor hoarding in the earnings calls?“ A couple of interesting write-ups followed.1

From Bloomberg’s Michael Sasso and Reade Pickert on August 4:

Overall, the labor market around Tupelo — Elvis’s birthplace — shows that firms will go to great lengths to avoid dismissals. They’re still reeling from months of struggles to fill vacant positions when demand was booming for the mid-priced sofas made locally, fueled by a pandemic-era buying frenzy.

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With job openings still elevated — even after they dropped the most in June since the start of the pandemic — economists say the pandemic-era aversion to job cuts could soften the blow from the economic slowdown.

“I do think there’s a potential for labor hoarding,” said Matthew Luzzetti, Deutsche Bank AG’s chief US economist. That “could mean that we don’t see the effects in the labor market take place for a longer period of time.”

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Michael Gapen, head of US economics at Bank of America Corp., sees the country entering a recession later this year — earlier than many other economists — and unemployment peaking at 4.6% next year.

“You don’t have to actively fire,” Gapen said. Industries that are hit harder will likely cut jobs, but “other firms and other sectors may say, ‘We’re just going to freeze for a little bit. We might get some natural attrition and then we’ll let this play out.’”

From Axios’ Courtenay Brown and Neil Irwin, also on August 4:

Most analysts believe any recession will be mild, says James Knightley, an economist at ING. Companies may "be reluctant to fire staff that they may end up having to recruit back maybe six months later."

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"A long, painful recession delivers one set of reactions, while a very short recession delivers another," says Julia Coronado, founder of economic research firm MacroPolicy Perspectives.

"The scarring this time might be that employers are inclined to hoard labor. They may say 'we're going to sacrifice a little bit of margin and not cut costs so aggressively' because it was really painful to spend a year and a half re-staffing."

Here’s economist Heidi Shierholz to Yahoo Finance on August 5:

One of the things I think about is employers just went through this really intense thing with COVID where a lot of employers saw the COVID recession having laid off a ton of workers, and then five minutes later, wanted them back. And so, that could be having some effect on how businesses are reacting to this. Like, “I'm not going to move immediately.”

Maybe there could be some return to this idea of labor hoarding during recessions, which used to be a really identifiable phenomenon that businesses would keep workers. Even if they knew that demand for their goods and services would go down, they would keep workers on because they valued the match. They'd invested in those workers. They didn't want to just let them go and then have to do the expensive retraining, rehiring on the other end when things got better.

In recent recessions, that phenomenon of labor hoarding has not been happening. And I do wonder — we don't know for sure. We'll see how things unroll. But I do wonder if we're seeing some of that coming back right now.

As a matter of convenience, of course it’s easier to just hang on to workers during a slowdown or recession if you expect the downturn to be brief and shallow.

Of course, this strategic decision won’t be free. If it does turn out to be the case that businesses hoarded labor during a downturn, then it’ll be a big headwind for profit margins and earnings.

Then again, the unusually elevated level of job openings — a massive economic tailwind — suggests employers continue to have too few workers, not too many. Indeed, job creation is still going strong amid this economic slowdown. This suggests the prevailing trend isn’t labor hoarding, but rather employers managing efficiently as excess demand in the economy comes closer in line with constrained supply.

Whether it’s employers hoarding labor or employers just not having enough employees, both explanations support the possibility that the Federal Reserve’s efforts to cool the economy won’t have a material unfavorable effect on unemployment.

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