Recent jobs data in the United States suggest a resilient but uncertain labor market. February US nonfarm payroll employment rose by 275,000, well above the 198,000 Dow Jones consensus forecasts. Multiple sectors experienced gains, including healthcare, government transportation, and warehousing. However, unemployment rose to 3.9% vs 3.6% in the prior year’s comparable period. Despite increasing mixed economic signals, the labor market continues to defy recession fears. Given the challenges of today’s tight labor market, companies continue to find creative strategies to attract and retain talent. One approach that has emerged post-pandemic is “labor hoarding” – the practice of keeping more employees on payroll than are currently needed to avoid future hiring challenges. In this blog post, we’ll explore the practice of labor hoarding, what labor hoarding entails, and why some firms are employing this strategy despite the additional costs involved. We’ll also look at some of the risks associated with the practice and how Professional Employer Organizations (PEO) such as Deel US PEO can help mitigate the myriad of workforce challenges companies face in the rapidly evolving and uncertain US labor market.
What is Labor Hoarding?
Labor hoarding refers to the practice of businesses holding onto excess employees during periods of economic downturn or reduced demand. Rather than laying off workers, companies retain more workers than they actually need, which can have significant financial implications. This phenomenon often occurs because of uncertainty in the market, with businesses trying to maintain flexibility and avoid the costs associated with rehiring and retraining new employees when demand picks up.
It’s a preemptive measure taken by organizations to fortify their talent pipelines and ensure adequate staffing as economic tides shift. Companies that labor hoard are making an upfront investment in human capital with the expectation that it will pay off down the road when demand picks back up and skilled labor is scarce.
Why Are Companies Labor Hoarding Now?
The primary impetus for labor hoarding stems from the tight job market and intense competition for workers across many industries. With unemployment rates hovering around 3.9% in February 2024, businesses are scrambling to acquire and retain the skilled labor they need to operate effectively. We note that this is despite the major layoffs in tech and financial services. Given the costs and challenges of backfilling open positions, many have concluded that it makes strategic sense to hang onto their existing workforces through any lulls in activity or demand. More broadly labor markets remain tight and evolving due to several factors including
- An aging workforce and the growth of the independent worker
- Shift in labor force participation
- Workers’ preferences for hybrid or WFH models.
- Uncertain hiring prospects in some sectors
- Excess demand for labor in pandemic-affected sectors
- A growing skill gap
The Pros and Cons of Labor Hoarding
Like any business strategy, labor hoarding has its advantages and disadvantages to weigh. Potential benefits include:
- Preserving institutional knowledge, training investments, and workforce capabilities
- Avoiding substantial recruiting, hiring, and training costs down the road when demand picks up
- Maintaining employee engagement, productivity, and morale rather than undergoing disruptive layoff/rehire cycles
- Staying ahead of the competition for limited talent pools
- Bolstering ability to quickly scale operations and capacity when needed
At the same time, potential downside and risks of labor hoarding include:
- Carrying excess personnel expenses during periods of lower demand and productivity
- Potential lowered performance if underutilized employees feel their roles are superfluous
- Challenges in effectively deploying, engaging, and re-focusing labor-hoarded workers
- Short-term profitability hits from surplus overhead
Highlights of America’s Labor Shortage
Source: Understanding America’s Labor Shortage
Where Labor Hoarding is Most Prevalent
While labor hoarding isn’t an entirely new phenomenon, the current tight labor market conditions have caused it to become more widespread across numerous sectors. Let’s look at some of the industries where it is most prevalent.
Manufacturing
Manufacturers have been scrambling to rehire and retain workers following pandemic-related shutdowns and supply chain disruptions. According to a study by Deloitte and the National Association of Manufacturers, the labor shortage in US manufacturing could exceed over 2 million jobs by 2030. Moreover, recent government spending and geoeconomic trends such as reshoring continue to lead a resurgence in US manufacturing. Given production ramp-up timelines and skilled trade labor shortages, many are choosing to hoard labor rather than trim headcounts further.
Healthcare
The pandemic significantly impacted labor dynamics within the healthcare sector. Given the aging demographics within the US, healthcare remains a critical sector. By 2032, the sector is expected to add 2.1 million jobs or 45% of US job growth. Challenges in the sector include an aging workforce and burnout. Despite healthcare staffing being extremely strained, providers are loath to let go of nurses, medical technicians, and other skilled clinical staff they’ve invested in onboarding and training – even if patient volumes temporarily decline at points. Through 2032, the healthcare sector is expected to see job growth in nurse practitioners (+ 45%), physician assistants (+ 27%), and home health and personal aids (+ 22%)
Technology
Despite the recent layoffs in the tech sector, labor shortages remain due mainly to the rapid advances and lag in relevant skills. The speed of advancements in artificial intelligence and cyber security requirements and wage growth suggest the need to develop strategies to ensure an adequate labor supply. From software development and engineering to customer support, hoarding tech talent has become commonplace as a hedge against future hiring challenges. Current tech sector unemployment rates sit at 3.3%, below the national average of 3.9%
Construction
In 2024, the construction sector will require an additional 500,000 workers to meet the demand in 2024. Furthermore, government spending from the CHIPS and Science Act and the Infrastructure Investment and Jobs Act will drive demand for construction jobs. The labor shortage in the construction sector is becoming more acute as baby boomers continue to retire, and the number of construction workers over age 55 exceeds 25%. Their absence will increase the knowledge gap as fewer new workers enter the industry. Despite above-average unemployment rates, pockets of labor tightness include skills such as HVAC, carpentry, electricity, ironwork, painting, plumbing, and roofing.
Trucking and Logistics
Supply chain disruptions have spotlighted the shortage of truck drivers and logistics workers. The last-mile shortage is particularly acute, with 80,000 last-mile drivers. The shortage of drivers is expected to double by 2030. Expanding gender diversity and increasing pay are but a few of the workforce strategies with little success for drivers. Additionally, the sector faces a shortage in other areas, such as technicians, mechanics, dispatchers, material handlers, shippers, receivers, and information technology specialists.
While these sectors have been at the forefront of labor hoarding, the practice has become fairly widespread with varied implementations across other industries as well.
Using Deel US PEO to Reduce Labor Hoarding Costs
One way companies can help mitigate the financial impacts of labor hoarding is by partnering with a Professional Employer Organization (PEO). PEOs provide comprehensive HR outsourcing services, allowing businesses to efficiently “rent” employees on a scalable basis while the PEO serves as the official employer of record. Deel is one such company offering innovative ways to combat labor hoarding in the US market. Deel is the leading global workforce management solution combining payroll, HR, performance, and compliance for any type of worker in over 150 countries.
Deel PEO service is a comprehensive solution that enables companies to hire and manage employees in the United States compliantly and efficiently. With Deel PEO, businesses can outsource critical HR functions, including payroll, benefits administration, tax compliance, and risk management, while retaining operational control over their workforce. Deel’s services are available in all 50 states. Key advantages of Deel’s US PEO include:
- Onboarding in as little as 5 minutes.
- Expert payroll administration
- Advanced HR and benefits compliance including guidance on EEOC, ADAAA, ADEA, FMLA, and CRA.
- Access to benefit plans from leading providers
- Training, HR policies, and on-demand HR support
Source: Deel
Partnering with a robust Deel’s PEO service offers access to a comprehensive suite of employee benefits, such as health insurance, retirement plans, and workers’ compensation coverage, which can help attract and retain top talent. By leveraging Deel US PEO, companies can focus on their core business operations while mitigating the risks and complexities associated with employment laws and regulations. Deel also offers an innovative US Contractor program for those organizations with a large contract or independent labor pool. Deel HR is free for companies with less than 200 employees.
Speed & Flexibility Are Key in the Current Environment
Finally, whether labor hoarding proves to be a prudent long-term strategy or merely a passing phenomenon sparked by current market conditions remains to be seen. In our view, labor hoarding as a strategy offers more downside risk than benefits. In the current labor market beset by near-term cyclical risks or longer-term structural challenges, speed, flexibility, and innovation remain critical to staying competitive. Ultimately, the strategic use of a PEO may reduce or eliminate the need for labor hoarding, improving workforce flexibility and cost control for your organization.
For more information on labor hoarding feel free to reach out to the team at ClearSky 2100 Ventures. To book your free demo for PEO services contact Deel. Be sure to follow us on social media.
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