Although companies are experiencing growth now, the signs are clear that a US recession is coming and likely will be upon us within a year. The Fed is starting to take measures to reduce liquidity and raise interest rates. Typically, recessions cause companies to pivot from their growth agendas into cost-saving agendas – including layoffs of staff. But layoffs would be a mistaken approach to a recession this time around. This blog shares my advice for handling the labor situation in the recession we now face.
The Talent Shortage Duration
Some people believe a recession would cool off the hot labor markets companies now must navigate because of the talent shortage (especially in IT and engineering skills) and the high attrition rates from the “Great Resignation” following the COVID-19 pandemic.
Some even believe the current talent shortage is short term and situational; they believe companies just need to get through this year, and the situation will stabilize after that. That is a mistaken assumption. As I explained in a previous blog, we have a “perfect storm” of factors causing the current labor challenges, and the talent shortage will continue for the foreseeable future (at least for five years).
Others believe a recession could move us into a situation where we have a surplus of labor for a while. That could happen for some types of talent, but not for the constraints we have in supplying the demand for IT and engineering skills. There simply are not enough experienced engineers and IT professionals to meet the demand right now, and this situation will only grow worse because many companies increasingly need these skills to build and evolve platforms, which they use for competitive differentiation. The inability to find and retain the talent to build and maintain/evolve platforms is increasingly a major constraint in companies’ ability to execute.
Companies’ Capital Considerations
Another driver of the white hot markets was the readily available access of credit. With interest rates approaching zero, companies have had easy access to capital to fund their growth agendas by building out their platforms. But as interest rates rise and the Fed and other central banks reduce liquidity, this capital will become more expensive and scarcer. Thus, companies will have less money to fund their digital transformation and platform investments. The tightening-up of capital will affect spending on technology and services.
The immense need for IT and engineering talent because of platforms will make up any short-lived surplus resources from a recession, and companies will quickly return to the constrained labor markets we currently experience. It is a long-term shortage.
Layoff And Hiring Considerations
As I pointed out earlier in this blog, recessions typically motivate companies to pivot from their growth agendas into cost-saving agendas – including layoffs of staff. But this time (unless we have a catastrophic recession like we had in 2008), will be different. I believe it will be a mistake for companies to yield to the temptation to pull back on staffing and lay off people.
The demand for engineering and IT skills will continue. It may relax quickly in a recession, but it will snap back very quickly and, in fact, will continue to build even more because of the nature of platforms evolving. Companies that lay off staff members or fail to keep hiring during a recession will put themselves in a very difficult situation. I believe that laying off any critical resources will prove to be a mistake a company would regret within six months.
Considerations About Staff Nearing Retirement
In a recession, it would be very tempting to use layoffs or early-retirement strategies to deal with older employees, as people in their late 50s and 60s are historically some of the most expensive resources. But the likely upcoming recession is different from others in the past because of the labor markets and talent shortage.
The reason it is different this time is because the underlying assumption for layoffs or early retirement strategies is now incorrect. The assumption is that companies will be able to hire younger, less-expensive talent to replace older workers. The fact is it will be almost impossible to replace them because of the labor shortage; this is particularly a challenge for engineering talent.
It also will be almost impossible to replace older workers that currently maintain and evolve legacy stacks. Although many companies wanted to migrate their legacy estates quickly to the cloud, many legacy applications proved too expensive or too risky to move quickly. The reality is that many legacy estates will be around for a long period of time. It is very difficult to attract new talent, younger talent, to support legacy estates because they prefer to work on new technologies in the cloud. On paper, it may look like companies can reach short-term savings by retiring older IT workers, but it will create a huge problem in supporting these legacy estates.
I believe it will be very unwise to lay off older workers or encourage them to retire early. Instead, companies need to motivate them to postpone retirement and persuade highly skilled resources to continue their employment. Consider ways to entice them by allowing them to work from home or allowing more flexibility in their work environment and hours.