Recession or Slowdown: The Growing Importance of Employee Trust and Human-Centered Leadership

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Recession Fears Intensify

That famous Hemingway quote from above perfectly captures the mood of the markets as aggressive Fed tightening, persistently high inflation readings, the war in Ukraine, and continuing supply chain disruptions offer clear signals that economic growth is slowing, especially in the U.S. and Europe. Yet, until last week’s surprisingly weak Job Openings and Labor Turnover Survey (JOLTS) report that showed a 1.1 million drop in job openings in August, the U.S. labor market has remained surprisingly resilient with another 263,000 jobs added in September and the unemployment rate falling to a 50-year low of 3.5%. Average hourly earnings remain elevated at 5 percent growth which could potentially complicate the Fed’s efforts to cool inflation, particularly if wage gains precipitate a repeat of the costly wage-price spiral the U.S. economy witnessed during the 1970s.

?Whether we are heading into a recession or are already mired in one, changes in monetary policy operate with a significant lag on the real economy so pressures will continue to build in the near-term for companies to taper their hiring plans with many already announcing a hiring freeze or even modest job cuts, particularly in high tech. During past economic downturns, companies have viewed labor as an expense that had to be aggressively managed just like any other major expense like materials cost or SG&A.?As a result, aggressive headcount reductions often played a significant role in how companies were able to lower their operating costs and maintain critical access to financial capital.?While access to financial capital will always be a strategic imperative for any company’s long-term viability, major structural and societal changes during the past decade have elevated the role and the importance that human capital will likely have on an organization’s sustainability.

Has the US Labor Market Reached a Turning Point?

?Even with the surprising August JOLTS report, many companies across a wide swath of industries continue to have difficulty filling open positions (about 10 million in August) as the number of persons per job opening remains at a historically low level of 0.6 (See Chart below).

?However, the labor market has lost some momentum in recent months as employers reassess hiring plans and look for creative ways to redefine where and how work is done and whether AI-based strategies can continue to reduce the physical number of workers that are needed for any given task.?Talent retention continues to be a major challenge for most companies as evidenced by record employee turnover and historically elevated quit rates.?Indeed, a recent survey by Mercer reported that a record high 81% of employees were suffering from burnout.?

There has been a modest recovery in labor force participation rates since the earlier stages of the pandemic but the current rate of 62.3% is still below the pre-pandemic rate of 63.4% in March 2020.?A full recovery to pre-pandemic participation rates would clearly lend additional support for employers looking to fill vacancies and ease some of the upward pressure on wages, allowing the Fed to pivot to a less restrictive policy stance on interest rates.

Employee Trust and Human-Centered Leadership Will Be Tested in the Period Ahead

?Even before the onset of the global pandemic in March of 2020, many employers had begun to view labor in a much different context than in past periods, adopting a more human-centered approach that puts people first where the employee’s health and well-being becomes a strategic imperative for sustainability. Such an approach doesn't mean that old school styles of leadership that focused primarily on performance management, expense control, profitability, and meeting project deadlines on time have become any less important because those metrics will always remain important.?Human-centered leaders are totally focused on enhancing the overall employee experience with an inclusive style that empowers employees to collaborate and embrace empathy and compassion in their day-to-day interactions. They encourage and validate employee feedback and accept their own vulnerability by taking responsibility for any mistakes made and are rewarded for their authenticity and transparency.

Employers Are Taking on a Larger Role in Employee Well-Being and in the Communities They Serve

Improving that overall “Employee Experience” reflects a growing recognition by business leaders that they can no longer avoid hot button issues and concerns that are increasingly coming into the workplace such as employee mental health, their concern over the recent outburst of gun violence across the country, the controversial Supreme Court decision on abortion, changing policies on Covid protocols, and lingering worries over whether employees feel safe in returning to an in-person office environment.

Moreover, according to a recent survey by the Edelman Institute, employees globally place a far higher level of trust in business than they do in any of the other major institutions like Congress, the Supreme Court, or even faith-based entities.?That employee trust is even more remarkable as it has taken place during the greatest disruption in the workplace due to all the questions and uncertainty created by the pandemic and the continued polarization of the political climate.?In a way, employers realize that with trust levels towards other institutions at all-time lows, employees expect their employer to take care of them and if they don't provide that expected care, employees will continue to leave and seek employers that do provide that expected level of care and trust. It's as if employers now see their employees as a community or a subset of the broader society we live in where there is an explicit social contract between the employer and the employee.

Will Employers Continue Support of Human-Centered Initiatives in a Recessionary Environment?

So, as we head into the fourth quarter, the economic data continues to paint a picture of a likely recession in 2023. Housing has already exhibited a sharp pullback with mortgage rates now hovering at 7%. ?Consumer confidence levels have remained much weaker than the levels seen earlier in the year. ?Despite higher nominal wage increases, real wages have continued to fall and the stimulus from earlier pandemic-induced initiatives is likely to wane in the months ahead. Finally, used car prices have been weakening for several months and have traditionally been a harbinger of weaker new vehicle sales, especially with sharply higher financing rates and record transaction prices.

As companies finalize their 2023 budgets in the next several weeks, the list of companies announcing reductions in headcount is likely to grow and at some point, the $10 trillion loss in consumer wealth from the sharp pullback in stocks and bonds this year is likely to reduce overall consumer spending.

Against the backdrop of this more challenging economic environment, a big question will be whether employers will continue to embrace this more human-centered approach to the workforce, or will companies revert to past behaviors when the recession arrives??In my view, how employers conduct any future layoffs, reductions in force (RIFs), and/or restructuring activities will speak volumes about their commitment to human-centered principles and policies towards their employees and whether currently high levels of employee trust can be maintained. Employers will build even stronger levels of trust with their employees if in the execution of any headcount reductions that are necessitated by a weaker economic environment, they honor the following human-centered principles:

• Continue to intensify efforts that promote more flexible work structures that can enhance the work/life balance employees want and need in the future.
• To extend generous benefits to any employees affected by a RIF or layoff and provide ample support through access to both Outplacement and Career Coaching services. Employees who leave without such support are also your customers and can further hurt efforts to retain and recruit through negative reviews on Glassdoor and Indeed.
• Carefully address and communicate with employees how any RIF or layoffs may impact current Diversity, Equity, and Inclusion (DEI) initiatives and underrepresented Employee Resource Groups (ERG).
• Assess how any RIF or layoffs may impact the Talent Retention of key employees.?Again, communication with employees is paramount.?
• Expand the level of support and significant investment that has been made in recent years on Employee Well-Being and Mental Health Initiatives, arguably the most important differentiator in human-centered leadership and the most visible sign that employers really value and care for their employees.
• Continue the progress made in recent years on Pay, Promotion, and Gender equity as well as policies that have been put in place on Paid Maternity and Paternity Leave Programs.

Wishing my clients, fellow coaches, and colleagues the gift of God’s abundant blessings,?

Dr. K