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The Wealth Effect

Perception is reality. Except when it isn’t.

By Michael Beygelman
 
According to the Bureau of Labor, the United States economy added roughly 80,000 jobs in October 2011. The BLS number released in the first week of November was slightly less than anticipated, although at the same time the BLS revised the gains that were reported in August and September upward by 102,000 jobs. Unfortunately, more than 150,000 additions on a monthly basis are needed to make any kind of a dent in the current unemployment rate, which now stands at 9 percent.
 
 
There is a glimmer of hope for the upcoming holiday season as U.S. retailers added 17,800 jobs last month, and on a monthly basis retailers have added an average of 16,500 jobs throughout 2011. So far the National Retail Federation (NRF) has not changed its forecast that retailers will hire about 490,000 seasonal workers this year, which is about the same as last year. The lion’s share of these workers will be temporary workers, so staffing agencies should see an increase in demand, and the populous will experience a wealth effect that is desperately needed to boost consumer confidence. It’s also worth noting that the NRF predicts holiday sales will increase by 2.8 percent, which is below last year’s 5.2 percent increase during the same period.
 
 
On the wealth effect, think about how it drives our spending behavior, especially around holiday times. The theory goes as follows: People should spend more when one of two things is true—when people actually are richer, objectively, or when people perceive themselves to be richer. The latter can happen for example, when the assessed value of their home increases, or a stock they own goes up in price, or they get a higher paying new job, even if it is temporary (because the human brain blocks out that last detail.)
 
 
What makes the wealth effect interesting is that it’s similar to our current employment situation: largely a matter of perception instead of reality. See, the problem with the wealth effect is that while demand for some goods goes up, demand for other goods (especially less quality goods) typically decreases with increasing wealth. Think about steak versus fast food. Primarily the wealth effect moves wealth from one area to another, but the reality is that no new real wealth is created.
 
 
Now consider the job market. The BLS announced 80,000 new jobs created—the truth is that number isn’t even accurate because the BLS revises historic numbers nearly every month—and suddenly people have hope. We’re talking about millions of people who are currently unemployed, not hundreds of thousands. Some 80,000 “purported” jobs added is hardly any evidence of a real beginning of a recovery, yet some turn immediately optimistic. Customer Growth Partners recently predicted that in 2011, “holiday sales will increase 6.5 percent on growth in disposable income, a decline in household debt, and new fashions that are drawing customers to apparel stores. That will prompt a slight increase in hiring over last year.”
 
 
To provide evidence that the current U.S. employment environment is a lot like the wealth effect, consider recent outlook information from leading sources. J.C. Penney spokesman Tim Lyons thinks that the department store chain will hire 37,000 seasonal workers, up from its estimate of 35,000 last month and 30,000 holiday hires in 2010. He says that the retailer wants to make sure it has adequate coverage for the heavier traffic. Macy’s and Kohl’s have said they plan to increase holiday hiring by about 5 percent, while Target thinks it will hire slightly more than the 92,000 seasonal workers it hired last year. Wal-Mart and TJX believe that 2011 holiday employment will be in line with 2010, yet some are much more cautious. Best Buy, for example, says it only plans on “hiring 15,000 seasonal workers this year, down from 29,000 last year, and is counting on permanent employees to work overtime to close the gap in terms of hours worked.” FedEx recently said it plans to hire 20,000 workers, up 18 percent from last year, but UPS thinks it might hire about 50,000 seasonal employees, which is about the same as in 2010.
 
 
Business leaders need to discern between real, sustainable trends and transitory feelings to ensure that they are neither over-hiring nor under-hiring. The real challenge is how businesses perceive that “work” is changing, which means that how they will handle the “workforce” will also change. Organizations that approach their talent strategy like a wealth effect will likely be chasing trends instead of creating sustainable talent models. Various governmental infusions only fuel the wealth effect because they do nothing to change the philosophy of employers and job seekers.
 
 
Employers need to stop thinking about workers and start thinking about work, while job seekers need to stop thinking about getting a job and start thinking about how they can contribute to a potential employer. Both parties are equally guilty in perpetuating the current unsustainability of the employment recovery, because both sides have become content with sound bites and government intervention. One disruptor to our current chicken and egg problem would be to study our current high level of unemployment socially and not just economically. Learn from human behaviors that are similar to market dynamics, would help put more Americans back to work.
 
 
Michael Beygelman is the global practice leader and president, North America RPO, at Adecco Group. He can be reached at michael.beygelman@adeccona.com
 

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