Colin Barr

Following the money in banking, economics, and Washington

Why companies are about to start hiring

May 6, 2011: 6:32 AM ET

In a nutshell, it's because they don't have much choice.

The bright spot in a drab employment picture is that workers have been stretched so thin during the past couple years that companies are going to have to (gasp!) hire more.

Stop slacking off!

You may be understandably suspicious. Corporate America has been raking in massive profits – they flooded in at a record $1.68 trillion annual rate in the fourth quarter of 2010 – with unemployment near 9%. Initial jobless claims are rising again after falling for much of 2010, yet the stock market is just short of record levels. Do companies really want to change this picture by hiring people and paying them and stuff?

The answer is they may have no alternative. The hiring picture is improving largely because the productivity gains that drove the profit rebound and the rip-roaring stock market rally of the past two years are petering out.

Hourly economic output rose at a 1.3% clip over the past 12 months, says Paul Ashworth of Capital Economics – down from 6.7% in the previous year.

While falling productivity growth is bad over a long span, because it means less wealth creation and slower economic expansion, in the early stages of a recovery it is unabashedly good news for workers -- something that has been in short supply of late, whatever happens with Friday's jobs report.

A productivity slowdown shows employers have harvested the low-hanging fruit of wage and employment cutbacks -- leaving those that aim to grow through the next cycle with little choice but to start staffing up.

"We suspect that firms just ran out of potential productivity-enhancing measures," Ashworth writes in a note to clients Thursday.

During the 2007-2009 downturn, companies not only shed jobs by the millions but also put the screws to workers who remained, forcing them to work harder, give ground on raises and benefits and, worst of all, stop mocking the boss' tie.

In the early stages of a recovery, this pressure eases as companies start thinking less about staying in business than about competing for a bigger share of the next wave of sales growth. This typically leads over time to a wave of hiring.

To say this last stage has been long in coming in this economic cycle is a major understatement. With 13.5 million Americans out of work and millions more working less than they'd like, there is no shortage of potential hirees.

Nor is there much of a sign restive workers are on the verge of demanding better hours or higher wages, unhappy as they may be about $4 gasoline. Unit labor costs, measuring the price of economic output, remain below their pre-recession level, and wages haven't risen faster than 2% since 2008. The first step has to be to get a job, after all.

"The fall in productivity growth is very typical in the early stages of a recovery, and gives us yet another sign we're in a hiring trend, as bumpy as it is at times," says PNC economist Robert Dye.

This is not to say unemployment is about to plunge and that happy days are here again. While a shift toward hiring will be well received by workers, it will squeeze corporate profit margins – a development that won't be well received by the stock market.

And if lower employment is surely necessary, it won't be sufficient to get the economy truly rolling along again. The biggest problem in the United States is the huge amount of debt weighing on household and government balance sheets, and you may have noticed we are not making a great deal of process on that front.

But for now, a little less cream for the fat cats is a price well worth paying for some more jobs.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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