Is the tougher workplace slowing down the economic recovery?

By Alana Semuels

April 8, 2013 1:27 PM PT

The workplace is changing as many companies, looking to increase productivity, ask employees for more while giving them less, according to a Los Angeles Times series. That’s difficult for individuals at work – but it might also have a profound impact on the economy in the long-term.

If workers feel that they have little job security and could be replaced at any time, they’re unlikely to spend a lot of money on the big ticket items that fuel consumer spending and, thus, the GDP. With professional development opportunities disappearing, promotions are harder to come by, restricting access to the middle class.

“Nobody is secure these days,” said Robert Reich, a professor at UC Berkeley who was Labor secretary in the Clinton administration. “Every permanent job can either be replaced by software or outsourced abroad or given to contract workers.”

One of the bigger hits to consumer spending could be the increased incidence of temporary or contingent workers at companies. Rather than pay healthcare costs and other benefits and commit to employees for the long-term, companies are increasingly relying on temporary help for positions that were once permanent.

The tough workplace: stories and photos

“Companies are saying, ‘I don’t need to hire a worker in a permanent job for many of the things that used to be done before,’” said Steven Berchem, chief operating officer at the American Staffing Assn. “Things are changing rapidly and businesses have to adapt quickly. Having a flexible workforce is best.”

A study by Susan Houseman, a labor economist at the W.E.Upjohn Institute, found that many employers who advertised positions as temp-to-perm (temporary jobs that would lead to permanent positions) actually didn’t hire individuals on a full-time basis. In many of these instances, there was no clear reason why the individual was not hired.

Around 1 in 4 people in the workforce is a temporary worker, according to the Aberdeen Group. When one quarter of the population doesn’t know if they’ll still be receiving a paycheck in a month, and have to put aside money to pay for their own healthcare, they’re not spending their wages on consumer goods. And consumer spending makes up 70% of GDP.

This temporary arrangement can work out well for some people: look no further than this feature in the Harvard Business Review: “The Rise of the Supertemp,” which talks about high-skilled executives who work on temporary projects, get paid very well, and still have time to spend with their families.

But for most Americans without MBAs, the reality of the temp world is much harder.

Santos Castaneda once had a permanent job in a warehouse, but when that disappeared, he would wait for a call from a temp agency every day to hear if he had work. In five months, he earned just $4,200, working 26 hours one week, 10 the next.

He couldn’t afford much with that schedule. He rented a room in a stranger’s house, rather than living with roommates or on his own, although he wanted more stability in his life, the money to buy his own car.

They say, ‘If you don’t like it here, you can go, but there are hundreds of people waiting for a job,’” Castaneda said. He recently decided to enroll in community college to improve his job prospects.

Few developed countries allow employers so much leeway in adding and cutting hours and hiring and firing workers.

“We allow employers to change terms and conditions of employment and to get rid of employees easier than anybody else in the world,” said Kenneth Dau-Schmidt, a professor of labor law at Indiana University. “When the economy is going well and things are booming, that’s good for us because employers add employees. When things are going poorly, they can readily get rid of employees. It increases the instability of the economy.”

That’s especially difficult in the United States, where healthcare and many benefits are tied to work.

But even those at work are struggling with the amount of money they spend on healthcare and other benefits. Companies are shifting more and more costs to employees as the costs of healthcare and other benefits go up, which leaves employees with less pocket change.

“There’s this big division in the workforce between the high road and the low road. In the low road, employees are widgets and the idea is to drive down costs as much as possible,” said Peter Cappelli, an economist at the University of Pennsylvania’s Wharton School of Business.

Businesses are asking the employees to take on more responsibility for their retirement savings accounts, which were hit by the market downturn during the recession. In past recessions, despite a market downturn, an employee would have still been guaranteed retirement benefits through pensions. But now, many more companies participate in defined contribution plans, rather than defined benefit plans.

With less stable retirement savings on hand, consumers again have less spending money to pour into the economy.

Stagnant wages are also playing into this situation. A study last year by the Royal Bank of Canada found that pay for new hires was lagging behind that of workers who didn’t lose their job during the recession. With more workers than there are jobs, there’s less incentive for companies to pay higher salaries. This also restricts the amount of money people – even those who are working – have in their pockets.

“A source of growth is consumption,” said Paul Osterman, a professor at the MIT Sloan School of Management. “As wages stagnate, and unemployment worsens, it feeds on itself.”

In other words, low wages and temporary and nonexistent jobs make it difficult for consumers to spend. Without their spending, fewer jobs can be created, and the stagnation of the economy becomes entrenched.

That’s brought many low-wage workers in logistics and fast food out in the streets, as they protest that they can’t live on their current wages. But with many others willing to take their jobs, it may be difficult for them to change their conditions at work.

“Wages cant get any lower – they could be at their jobs for 10, 15, 20 years, and still be making the same amount,” said Jonathan Westin, the campaign director of New York Communities for Change, which helped organize the fast food protests. “Right now, there’s no path to break into the middle class.”

Recent government data show that consumer spending is finally starting to accelerate again, growing 0.2% in January. But that’s nearly four years after the recession officially ended. And the personal savings rate was 2.4% in January, the lowest monthly level since late 2007. It raises the question – if jobs were more stable, would savings be higher, and would consumer spending have started growing sooner? If the workplace was a more stable place, would the economy still be struggling?

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