Could corporate 'pre-hiring' spark a U.S. recovery?

Investors, of course, have heard of pre-sales by retail outlets, pre-school for children, and in the Ivy League and other competitive college circles, pre-acceptance for certain students.

Well, perhaps it's time for large corporations and other businesses to consider "pre-hiring."

Put two economists in a room and you have a conversation. Put three in a room and they're likely to, as the saying goes, devise an entirely new economic system. Economists David H. Wang and Richard Felson were part of one such discussion when the topic of pre-hiring came up. Here's how pre-hiring would work:

The U.S. economy is characterized by a lack of demand. Corporations usually respond with cutbacks, then after the recovery starts, hire only after demand has picked up and signs of an economic recovery are indisputable, Wang said. However, if the recovery signs do not appear, corporations sit on the sidelines, from a hiring standpoint, and hiring is postponed.

The problem with that historical tendency is that if it's replicated in today's environment, the United States economy is going to remain in a recession for a long time, Wang said.

Must fill $2-3 trillion GDP hole

"The U.S. economy is in a $2-3 trillion GDP hole," Wang said. "There's likely to be a $2-3 trillion drop in output below our potential GDP over the next three years. It is an awesome amount."

"The fiscal stimulus package will fill up a portion of the hole, but it won't be enough," he added. "We're going to need more stimulus, more demand, and pre-hiring will help create it."

Under pre-hiring, corporations add employees to operations before they typically would. "If the pattern is duplicated across the U.S. economy, demand rises from consumer spending and related activity, retail sales and commercial activity will increase, and within a quarter or so, you have substantially higher demand, which will prompt additional hiring and business activity," Wang said. "It's sort of like, 'you get the conditions you expect or set in motion,' or 'nothing succeeds quite like success.' "

Felson said pre-hiring would help end the negative cycle of layoffs - reduced demand - lower revenue - more layoffs that's currently plaguing the U.S. economy. "A portion of economics argues that you get the outcomes that you set in motion. If enough companies, large and small, make concerted efforts to first avoid laying off personnel, then add employees, you do, to a certain degree, create the stronger demand that you and everyone else seeks. It's a form of priming the pump," Felson said. "The key is, the hiring must occur near universally."

Of course, pre-hiring is not without risks for companies. If one or only a few scattered companies pre-hire, the demand never reaches a critical mass -- and the economy continues to lag, Felson said. At that point, the decision to pre-hire may look like a bad one.

In normal times, no company would consider prehiring. "But we are not in normal times. It's sort of like New York City's water system. If rainfall is fine, there's plenty of water in the Catskills reservoir system to supply drinking water. But during a drought, the city has pumps to pump water from the Hudson River into the water system. . . . We have to use extraordinary measures to create demand and get demand back to where it should be," Felson said.

Analysis: The corporate pre-hiring tactic deserves a review, and public officials should consider tax code changes that will encourage companies large and small to hire and/or retain employees. The $787 billion stimulus package will help, but there's likely to be at least a $1 trillion output hole even after the stimulus takes effect, and pre-hiring would help fill it. Pre-hiring does present risks for companies, but the view from here argues the greater risk stems from not doing enough and seeing U.S. economic conditions deteriorate further.
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