Hiring Freezes Thaw as Winter Ends
Subject Demand for labor
Topic Labor markets
Key Words Employers, hiring freeze, firms, recovery, demand, workers, outsourcing, consumers
News Story

In 2001, nearly 40 percent of employers instituted a hiring freeze, according to the William M. Mercer consulting firm. In early 2002, there are signs of a thaw. Manpower, the staffing services company, has found that 21 percent of firms expect to hire in the second quarter, compared to 16 percent in the first. There is growing optimism about an economic recovery and higher business demand.

But firms are being strategic, and are not hiring just to fill openings. For example, Goode Van Slyke Architecture in Atlanta is adding just two workers, and possibly a third. Hyperion, a business intelligence software provider in California, is hiring accounts payable employees instead of outsourcing the service. BigBand Networks in Fremont, California, is hiring cable operators in part because it believes that consumers will want entertainment, regardless of terrorism. It is also expected that firms will start to replace poor performers with more productive workers.

(Updated May 1, 2002)

1. Draw a diagram with axes representing the wage rate and employment level in the U.S. labor market. Add a labor demand curve.
a) Show what happens when firms decide to hire more employees due to the economic recovery.
b) Explain what you have drawn in terms of the determinants of the demand for labor.
2. Now draw a wage-employment diagram of the demand for labor by the Goode Van Slyke Architecture firm. Add a horizontal line representing the competitive market wage rate paid by the firm. Mark the initial equilibrium.
a) Illustrate the effect of the firm wanting to employ more workers
b) Explain the calculation the firm will implicitly or explicitly perform to figure whether to hire two or three workers.
3. Hyperion is hiring its own accounts payable employees now, rather than relying on external employees. Consider the determinants of the demand for labor, and explain why the demand for in-house employees might have increased, while the demand for external employees might have decreased.
4. Draw another diagram of the demand for labor by an individual firm and the market wage rate.
a) How would the demand curve differ for poor performers and good performers? Explain what you have drawn with reference to the determinants of labor demand.
b) Explain how this analysis helps you make sense of the news story.
Source Stephanie Armour, "Companies return to hiring days," USA Today, March 18, 2002.

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