Here are steps HR departments can take to ensure organizations are prepared for potential economic downturns.
The HR function is an organizational engine — whose job is to find the right people and steer them toward the company mission. When economic slowdowns occur, the HR engine must adapt; otherwise, it will sputter and impede business progress. At worst, it will cease to run, and force you to close your doors. For this reason, you must prepare your HR engine for economic speed bumps.
What is an economic slowdown?
An economic slowdown, or economic downturn, is when there’s a drop in economic growth over a sustained timeframe. Economic slowdowns are usually characterized by higher unemployment, low consumer spending, decline in house prices and investments, and a spike in government borrowing.
When economic activity dips, it’s typically a sign that a recession is imminent, though it does not necessarily mean that one will happen. A recession is when there’s a significant decline in economic activity for more than a few months.
As stated in an article published by the Society for Human Resource Management, “Recessions are less predictable than taxes but as inevitable as death.” One of the most devastating economic slumps was the 2007-2009 Great Recession. More recently, there’s the COVID-19 pandemic, which led to a global economic crisis. While the U.S. economy is getting back to pre-pandemic output levels, it’s still important to prepare your business for any future downturns that could happen.
A consistent feature of recessions and economic slowdowns is the disproportionate amount of business closures — especially among new businesses and very small businesses.
A consistent feature of recessions and economic slowdowns is the disproportionate amount of business closures — especially among new businesses and very small businesses. Per a report by Brookings Institution, “Generally, the older and larger a small business, the better it fared during the Great Recession. Micro businesses (fewer than 10 employees) and young businesses (zero to five years old) are most vulnerable across all sectors.”
How do economic slowdowns impact HR?
Recessions and economic slowdowns pose a real dilemma for the human resource department, which must make pivotal decisions to keep the company afloat. These decisions often include uncomfortable actions like restructuring, downsizing, and employee termination.
HR leaders and other stakeholders may need to decide whether to:
- Decrease the annual HR budget
- Freeze or scale back hiring
- Reduce or eliminate incentive pay
- Trim employee benefits programs
- Lay off employees
- Cut or reshuffle work hours
- Hire independent contractors
- Reassess work models (e.g., onsite, remote, hybrid)
In addition: HR leaders must determine:
- What short- and long-term changes should be made to the HR strategy
- How to develop talent to drive business performance in the face of economic challenges
- How to utilize people and other resources more efficiently
Ultimately, when an economic slowdown happens, you’ll likely need to cut back on spending in order to keep your HR engine running.
With so many potential factors to consider, preparing your HR department for economic slowdowns may seem like an insurmountable task. It gets easier, if you know what to focus on.
Preparing HR for economic slowdowns
Follow these steps to properly prepare your HR team for a potential economic downturn.
Pay attention to macroeconomics signs
Economists recommend that employers keep an eye out for large-scale signals that are typically indicative of an encroaching economic slowdown or recession, such as:
- Elevated levels of unemployment
- Fewer employees quitting their jobs
- Decreased payroll growth
But as noted in the aforementioned SHRM article, “those data points generally lag the actual onset of a downturn.” One expert says, “When they tell you the number of job postings is going down critically, it’s usually three to six months ahead of the recession.”
You can obtain data that’s not only closer to the recession but also more specific to your business by partnering with a recruiter who understands your industry.
Prioritize your HR initiatives
What should be prioritized during an economic slowdown varies by HR department, as each industry and business is different. Oftentimes, the most important priorities include:
- Building relationships with key business partners that can help you stay in business — such as those who can assist with HR strategy and people operations
- Keeping employees productive and engaged so that they will perform optimally, even during unstable times
- Developing leaders to motivate employees and make sound decisions. Without strong leadership, your business will likely collapse under the weight of an economic downturn.
To know what to focus on, conduct a cost-benefit analysis of your HR processes and programs. Remove or strengthen the processes and programs that are not contributing enough value to the HR function and your overall business strategy. For example, what processes can you automate to speed up HR administration and reduce costs? Should you fill open positions when an economic downturn is looming?
Tough questions like these need to be answered when prioritizing your HR roster. Also, during workforce planning, make sure you consider the current and future state of the labor market. As one expert says, “Although a recession may temporarily ease the talent shortage in some areas, within a few years, the labor market will be as tight as ever.”
To know what to focus on, conduct a cost-benefit analysis of your HR processes and programs. Remove or strengthen the processes and programs that are not contributing enough value to the HR function and your overall business strategy.
Adjust HR policies strategically
Before modifying HR policies, you’ll need to observe the current situation carefully and all the components necessary to achieve your business goals. Then, make adjustments that will help you stay in business now and in the future. From recruitment, hiring, compensation, benefits, to retention and other HR verticals, all changes and their potential impacts must be fully explored prior to implementation.
For example, if you must layoff employees or slash wages, be sure to comply with applicable company policies and employment laws. Also, be mindful of the emotional and psychological effects — such as anxiety and job insecurity — that cost-cutting measures could have on departing and remaining employees.
Involve your employees in change management decisions
Some employers adopt a top-down approach when restructuring their operations in response to economic slowdowns. This strategy is often based on data gleaned from competitive benchmarking, wage projections, or other forecasting and predictive analysis. Because non-management employees are kept out of the loop, when changes do occur they come as a complete (and unwelcome) surprise.
HR leaders should draw on not only analytics and forecasts but also feedback from their most priceless asset: their employees. By incorporating employee input, you can achieve your goals with more precision and less conflict, because both management and employees have bought into the process.