Headwinds to Labor Market Recovery Part III: Permanent Layoffs

In the first post in this series, we examined how slower job creation in this recession is slowing the recover. Then we looked at how employers are limiting workweeks in order to avoid laying off some employees. A third headwind which will impact the speed of labor market recovery, is the historically low level of those temporarily unemployed. In previous recessions, firms temporarily laid off employees knowing that they would quickly rehire them once the economy rebounded. However, during the current recession, businesses have been more inclined to permanently reduce staff, an indicator that, even as the recovery proceeds, firms are not expecting to quickly re-staff previous positions.

During the six previous recessions, the share of those temporarily unemployed averaged 33.6 percent of total unemployment. In this recession, businesses have opted to make permanent layoffs, pushing the share of temporary layoffs to a record low of 15.5 percent in November 2009.

Those permanently laid off will either have to acquire new skills before re-entering the labor market or relocate to other areas where their current skills are in demand. Neither solution offers immediate relief to the persistently high unemployment rate.

There is some positive news, however. In late 2009, businesses’ use of temporary staffing increased, which in past recessions was a harbinger for future permanent hiring. But businesses still have significant slack in their current employees’ work week, which will need to be utilized before hiring new staff.



Other posts in the series Headwinds to Labor Market Recovery
Part I: Slower Job Creation
Part II: Excessive Slack in Work Week