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Why Aren't Companies Hiring?

Why aren't companies hiring? There are all kinds of theories. Taxes too high. Taxes too low. Too much regulation. Too much speculation. Everyone has an idea.

The best way to find out why businesses aren't hiring (and they are hiring -- just not enough) is to ask them. That's what the Philadelphia Federal Reserve's Business Outlook Survey does. Here's what its most recent reading shows:

Source: Philadelphia Fed.

Lots of things are holding businesses back from their potential, but the two largest are:

  • Sales are too low.
  • Since sales are low, businesses are keeping profits up by keeping expenses (like employment) down. That's why profit margins are near record highs.

This closely matches other private business surveys like the National Federation of Independent Businesses survey and the PricewaterhouseCoopers' Annual Global CEO Survey. All have told a similar story: Bad regulations and uncertainty from Washington are a problem, but low sales are by far the biggest worry.

That will eventually change. Despite naggingly high unemployment, sales are coming back and consumer spending is holding up. It's still well below where it should be, but business investment is coming back, too: Capital expenditures among S&P 500 (INDEX: ^GSPC  ) companies hit a new record late last year. Capacity utilization is also springing back close to normal levels.

Another more subtle point holding back hiring: Businesses shook out a lot of redundancies and inefficiencies during the recession -- teaching one person to do a job that used to be done by three -- and they aren't likely to go back to the old ways. After describing a friend whose moving business slashed employment, wages, and benefits, Berkshire Hathaway (NYSE: BRK-B  ) Vice Chairman Charlie Munger was asked if his friend would ever revert to the old way of business. He replied: "No, it's never going back. He squeezed the cost out. That's one of the main troubles of the economy, that everybody has done what my friend in the moving business has done. It's perfectly logical."

"That's the way capitalism works," he said.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (5) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 23, 2012, at 2:33 PM, henryyves wrote:

    "Eventually, all paper money will attain its intrinsic value -- Zero!" Voltaire

  • Report this Comment On May 23, 2012, at 3:00 PM, kyleleeh wrote:

    One thing that I see at my workplace that I think will have a big impact on the jobs market over the next 5-10 years:

    While my workplace may not be creating very many "new" positions we are going to have about 2/3 of our old positions vacated by retiring baby boomers in the next few years.

    Economists keep focusing on job creation numbers, and keep coming up with bleak employment futures, but I think we may have a labor shortage in the next decade. The same thing has already happened in Japan.

  • Report this Comment On May 23, 2012, at 3:12 PM, mikecart1 wrote:

    I agree with this article because I am currently looking for new opportunities (not unemployed, just looking and applying). The job market is a battle of who can market themselves the best at this point. In this battle, tenths or hundredths of a GPA can make a difference, that one extra project you have on your resume can make a difference, that placement of your school on ranking boards like US News & World Report can make a difference, how close your address is to the job you are applying to can matter, how you spell your name can matter. it is crazy out there!

    I gain a new understanding of how tough it must be for those unemployed and looking. Heard of people with legit degrees at any other time period (legit meaning easily starting at 50-70K) applying to hundreds of jobs and still jobless.

    This country is in a bad situation.

  • Report this Comment On May 24, 2012, at 1:03 PM, slpmn wrote:

    #1 and #2 on the list are the only legitimate reasons on the list. Everything else is just excuses and griping.

    Businesses add people when they're growing, and they don't add people when they're not. The clients we work for complain about taxes, regulations, and uncertainty all the time, and I'm sure they love to tell politicians that it's keeping them from hiring more people.

    However, I have yet to actually see an example where one of our clients was actually sitting there thinking, "Hmm, maybe I should add a new person, but I don't know what my marginal tax rate is going to be next year." or "...but I don't know what our group health premiums are going to be..." etc., etc.

    As for uncertainty about regulations, yeah, that scares some small biz owners into paralysis. But while they're sitting there scared, there are others in the same industry who take it as a cost of doing business and understand that as long as the playing field is level, it doesn't matter. And those guys are eating the scared guy's lunch, and - growing and hiring.

    If you think you can grow, or want to grow, or need to grow, you add staff. Otherwise you don't. Hiring will return when the economy comes back, and not a day, week, month, or quarter sooner, regardless of who's in the Oval Office or controls congress. Deleveraging recessions take time to recover, and we have a way to go. But saying that doesn't make a good sound bite and it doesn't get you elected, nor does it even make an interesting topic for a cable news show.

    So, the talking heads and politicians bat around all these other factors for why the job market is so sluggish, but it's just a sideshow.

  • Report this Comment On June 08, 2012, at 6:07 PM, borneofan wrote:

    No mention of the loss of mobility due to housing? If you can't sell, you can't move to the jobs. I have too much tied up in the house to just walk away from it. There is no relocation paid for temp positions. And it is much harder to justify moving to work if the mortgage remains around your neck, in addition to a rental and a relo.

    Do you gamble your last dollar on a temp agency promise, rolling the dice with strangers? If they are crooks, or the job does not pan out, cozy up under a bridge in a strange town? Or straggle along and hope for the best locally, fighting for whatever work you can find? Might end up under a bridge you know all too well?

    No easy answers. This is no sideshow. It's the main event.

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