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The Recession’s Silver Lining
Companies’ Upper Hand Helps Stock
Although overall it’s horrible, the recession will still offer benefits to many organizations. The college where I work, for example, is considering increasing professors’ workloads.
A year ago this would have caused roars of protest. But with the school’s diminished endowment, most of us will accept our employer’s need to get more from each worker.
Businesses similarly can now get away with imposing burdens on their employees that would have caused outrage before the recession. This is especially true because a threat to quit, normally a worker’s best defense against worsened conditions, lacks credibility in our job-scarce environment.
And because jobs are so hard to find, firms that do want to hire can have their pick of candidates. In the past, many job seekers could use multiple offers to get potential employers to bid against each other and raise their salary. Today, however, I suspect starting salaries for new hires in many positions are well below what they were a year ago.
You might think the recession would allow firms to lower wages of existing workers because these employees now have fewer alternative employment options. But
for reasons economists don’t really understand, wages are “sticky downward,” meaning they almost never fall. Firms can, however, use the economic downturn to cut employee benefits.
The recession is also making it easier for businesses to fire workers. Prestigious law firms, for example, have been firing scores of associates. In normal times clients might conclude that a firm that lays off workers is declining and couldn’t be trusted with long-term projects. But with our depressed economy, many clients will understand that even a firm doing extremely well relative to peers might need to shed employees.
Firms that lay off workers don’t have to worry much about alienating retained employees; most will understand that even a caring employer might have to reduce its wage bill to survive. The downturn will, in addition, give some managers a convenient excuse to enact unpopular reforms. For instance, my employer and many other all-women’s colleges find it increasingly difficult to attract students who want to attend a school without men. Yet they rightly fear that going coed would alienate alumni.
But a women’s college could probably get away with using the recession as a justification for admitting men, arguing that without such a radical move it might not survive. I suspect that the managers of many businesses will likewise implement reforms they’ve long wanted to make but couldn’t for fear of employee or customer backlash.
Finally, the recession will reduce competition for surviving firms. Take Best Buy, which has been on a path toward a much stronger market position since Circuit City was liquidated. Eventually, another firm will fill Circuit City’s abandoned niche. But between the recession’s end and that successor’s appearance, Best Buy will likely earn greater profits than it would have in better economic times.
Some firms that survive the recession will fulfill Nietzsche’s dictum of “That which does not kill us makes us stronger.” But because stock prices have fallen so much, does the market understand all the benefits firms can derive from this recession? Yes, and such an understanding is actually reflected in current stock prices. It’s just that this recession is so potentially terrible that if not for these gains, the market would be down even more than it is.
James D. Miller is an associate professor of economics at Smith College in Northampton, Mass. His latest book is Singularity Rising: Surviving and Thriving in a Smarter, Richer and More Dangerous World (BenBella Books), on sale in October.