What drives hiring uncertainty?

Ekkehard Ernst ILO and IZA

Ekkehard Ernst
ILO and IZA

Persistently low hiring with sky-rocketing unemployment rates have been the most striking consequence of the global economic crisis. Currently more than 18% of workers are out of a job in advanced economies, and the unemployment rate is only slowly receding. In European countries, unemployment is even expected to reach its peak only in 2014 before seeing some improvements. Clearly, low growth and the unresolved public and banking sector debt problems are largely responsible for this low employment growth. Recently, however, a new dimension has been added to low job creation rates in advanced economies: High and rising hiring uncertainty. Indeed, besides the weak overall outlook for growth, the uncertainty about new opportunities for investment and jobs makes companies reluctant to advertise new vacancies and hire workers.

To measure the extent to which hiring uncertainty prevents companies from expanding their workforce, the ILO has developed a new indicator which captures the assessment by employers of the uncertainty of the labour market outlook when taking hiring decisions. The ILO hiring uncertainty index is based on the Black-Scholes option pricing model and is calculated for all G7 countries. It makes use of an economy-wide indicator of hiring intentions of the ManpowerGroup which is calculated from a survey of employers. The indicator measures hiring intentions and is calculated as the difference between the percentage of employers that expect an increase of employment in their establishment for the next quarter and the percentage of employers that expect a decrease. In this contribution, we discuss the implication of changes in hiring uncertainty for unemployment and possible policy levers to reduce it.

Hiring uncertainty and unemployment

Hiring uncertainty and the unclear picture that firms have regarding their economic and the policy environment drives up unemployment over and above the effect of weak economic growth (see chart below). Indeed, firms are not only concerned about the uncertainty regarding their potential new areas of growth but also about the general political environment that might affect the profitability of their investments. Both labour market and political uncertainty play an important role in explaining the strong and persistent uptick in unemployment rates in G7 countries. Moreover, it appears that changes in uncertainty precede changes in unemployment rates, indicating that additional information can be gained from such indicators to improve labour market forecasts.

Hiring Uncertainty and Unemployment

What explains hiring uncertainty?

In order to better understand what is driving hiring uncertainty, several potential factors were regressed on the evolution of the ILO hiring uncertainty index in G7 countries. Given the high correlation shown above between policy uncertainty and hiring uncertainty, a first candidate was to look at the evolution of public debt in these countries. As can be seen in panel A of the chart below, this is indeed a significant factor to explain the evolution of firms’ hiring uncertainty. In periods where countries are confronted with high levels of public debt, the hiring uncertainty of firms is more than 1 percentage point higher than in periods where it is low. In addition, as panel B demonstrates, standard economic factors also enter the hiring uncertainty. Indeed, when using unit labour costs as an indicator for firms’ competitiveness, it can be shown that higher levels of unit labour costs (i.e. lower levels of competitiveness) are correlated with higher levels of uncertainty, an intuitive result. In this case, the impact of changes in competitiveness on hiring uncertainty is even stronger, as firms face hiring uncertainty that is 2 percentage points higher when competitiveness is low in comparison to their competitors with high competitiveness.

Drivers of hiring uncertainty

These two results suggest that on-going attempts in Europe to limit a further increase in public debt (or better to reduce the currently high levels of such debt) and a reform agenda to strengthen competitiveness, in particular among Southern European companies, might push up hiring significantly to the extent that it reduces hiring uncertainty. Such a positive contribution to job creation might compensate for the otherwise deflationary effects that austerity policies and structural reforms have in the short run. Ideally, the effects will be strong enough to make up fully for the reduction in aggregate demand that these measures have already brought and could help to smooth the transition to an improved outlook for European labour markets.

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