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Employers May Be Reluctant to Reduce Headcount to Address Business Slowdown

    Client Alerts
  • September 30, 2022

When we talk with clients about their businesses these days, the universal complaint we receive from every type of company is the difficulty they continue to have in attracting and retaining qualified workers. Ever since COVID-19 restrictions began to be lifted, the business press has been full of articles discussing this labor shortage, especially at the older and younger ends of the workforce.

This labor shortage raises questions about employers’ reactions to a significant recession or business slowdown. In the past, the typical reaction to a decrease in customer demand has been to look to cut costs. Often, the most effective way to reduce costs is to decrease employee headcount, thereby saving the labor expenses associated with those workers.

However, given the understaffing that many businesses currently experience, and the difficulty in recruiting new workers when the economy recovers, will this turndown be any different? Will employers decide that they need to preserve their workforces, even in the face of slowing business demand?

If employers decide to pursue cost-cutting measures that do not involve headcount reductions, what other options do companies have to manage labor expenses? Apart from obvious steps like ending overtime opportunities, employers could look to furloughs, reduced work schedules, and other measures that fall short of actual layoffs. Many companies gained experience with these options at the outset of the pandemic. Of course, if these measures result in decreases in compensation, will those workers leave for other job opportunities? Employers could also offer voluntary reduced-hour schedules that would lessen costs without driving workers to seek alternate employment.

In the end, employers may decide to preserve their current headcounts and payroll despite a business turndown. If so, this would be the first recession in memory that does not result in significant increases in unemployment or a large uptick in hiring as the economy begins to recover.