Effects of Economic Uncertainty on Business Decision Making

Market uncertainty has never been higher. Business observers, CEO’s and policymakers have repeatedly raised concerns about the uncertainty of doing business during the ongoing financial and economic crisis of 2007. No one is sure whether or not people who do business with Uncle Sam will be left out in the cold. This kind of uncertainty can play havoc with business and with the economy at large.
The Patient Protection and Affordable Care Act (PPACA), widely recognized as Obamacare, was signed into law by President Barack Obama in March 2010. It is intended to decrease the number of uninsured Americans and lower the overall cost of health care in the U.S. Most business owners are concerned about the program’s potentially harmful effects on the cost of employee health care coverage. Charlie McCrudden, vice president of government relations for the Air Conditioning Contractors of America, said “There’s a lot of uncertainty about what contractors will do about providing health care for their employees…” (Anesi).
As uncertainty continues to grow in the markets, so do the changes in employment practices. During challenging economic times, many businesses are opting to hire temporary and contract workers as opposed to full time employees. Not only does this hiring practice affect employment rates and the economy as a whole, but is also affects those seeking work and financial stability.
Uncertainty and ambiguity are a key challenge for business leaders today. Organizations are finding that they must increasingly plan for contingencies in the future. The rate of change has accelerated, indicating that business leaders must learn how to strike a balance between managing complex issues today and predicting the uncertain issues of tomorrow.
In this paper we explore the role of uncertainty on corporate America and corporate employment. First, we investigate the uncertainty caused by the PPACA for American businesses. We examine these issues further by discussing an example from a member of this group that manages a hospital clinic. Second, we discover how uncertainty impacts corporate employment, and shifts the ratios between full time workers and part-time/contract workers. These effects are highlighted through two examples from our team.
As mentioned above, the PPACA legislation was passed in 2010. Its main purpose was to guarantee health care for all Americans while at the same time reducing the aggregate cost of healthcare for the entire U.S. population. While most Americans would agree, our prior path of uninsured citizens and drastically increasing health care coverage was not sustainable, however, the policies and implementation of the PPACA have created a great deal of uncertainty in the medical marketplace.
As of January 2014, an estimated 9 million Americans gained health care coverage due to the implementation of PPACA. An additional 3.1 million adults under the age of 26 also gained coverage under their parent’s health insurance plans. This influx of new patients, coupled with increased pressure from the government to cut costs, has created rising instability amongst the healthcare providers. Mandatory technology upgrades, such as costly electronic medical record systems and new quality standards for reimbursements, have fueled uncertainty in the health care market (Kocher, Ezekiel and DeParle).
The effects of the PPACA legislation are heavily felt by the smaller, specialty hospitals. One such example is the Shepherd Center in Atlanta, Georgia, which specializes in spinal cord injury and multiple sclerosis. In an effort to share resources and knowledge specific to this niche market, Shepherd has recently formed an alliance with Craig Hospital, a similar specialty hospital located in Denver, Colorado. Management’s decision to form this symbiotic alliance was in response to the increased costs associated with the newly implemented legislation. Without increasing efficiencies and managing expenses, there is a strong possibility that one or both of these hospitals might cease to exist. In addition to increasing costs, reimbursement payments to the hospitals are expected to remain somewhat stagnant which means cost cutting is one of the most feasible ways to counter the effects of traditional inflation.
Management's decision to integrate with Craig Hospital has thus far lead to positive results. By sharing the best practices of both facilities, the Center has been able to reorganize a number of departments, leading to gained efficiencies and process improvements. In order to maintain cost-cutting strategies, Shepherd’s hospital administration will need to closely monitor the capital expenditures of each department to ensure all spending remains lean. Health care reform was unquestionably needed to counter the number of uninsured Americans and to reduce the unnecessary expenditures of the healthcare industry, but the long-term effects of the PPACA have yet to be seen.
In addition to the questionable future cost of healthcare, corporate America has had to and is currently dealing with the consequences of the great recession of 2007 through 2009. While companies struggled to stay afloat during this economic hardship, management was left with the daunting task of cutting cost due to the unknown economic outlook of the company. In order to reduce costs while maintaining the necessary workforce to meet consumer demand, employers have opted to replace full-time employees with temporary help, thus reducing the company’s costs by the amount equal to the per person cost of health insurance for each full-time employee replaced.
In 2013, roughly 17 million people held temporary, contract, freelance, or consulting positions, which equates to 12% of total employment (Rugaber). This example illustrates the reluctance of firms to invest in long-term employees due to the uncertainty of the economy. As a result, the displaced full-time employees are left without a job or health care benefits. As the number of displaced full-time workers increases, the economy will be detrimentally impacted by a rise in the unemployment of skilled workers and an increase in tax supported health care benefits of the PPACA. The movement towards temporary hiring has been evidenced personally by two of our team members. The first member gained employment through a temporary agency and was offered full-time employment with the contracted firm 12 months after working as temporary help. Prior to the recession, the average length of time a new hire spent working as a contractor was only three months. Due to the uncertainty in the marketplace, the average length of time a new hire remained under contract during and after the recession was greater than 12 months. Another member of our team has held the status of “contract to permanent” for over 24 months with the same company. While both of the above mentioned companies survived the recession due to managerial decisions to cut the cost of health care benefits, these decisions will ultimately have a detrimental effect on the economy’s labor force.
Management has a tough job during these uncertain times. While future revenue is unknown, cost is one factor that remains relatively stable and is somewhat manipulatable by management. When comparing unnecessary costs, one might say that health benefits are an unnecessary expense when compared to necessary costs such as rent, salaries, and utilities. Health care is one benefit our team does not take for granted. We feel management could have explored different avenues of cost cutting while maintaining the benefits of the full time employees. Some possible cost cutting examples are: a temporary reduction of employees salaries, an increase in health insurance deductibles, a possible reduction in federal and state tax through incentive programs, termination of substandard employees, a reduction of upper management salaries, or a freeze on salary increases.
Some level of uncertainty plagues every industry in corporate America, each industry is impacted differently depending on the nature of the business and the level of uncertainty in the market. It is speculated that the level of uncertainty in the economy will continue to increase due to technological advances, world affairs, and changes to economic policies. The world is becoming increasingly complex and the uncertainty will subsequently continue to increase. How management decides to handle this uncertainty plays a key role in the future success of their company and the economy as a whole.

Please see Appendix A, B, and C on the following pages.

Appendix A

Economic uncertainty has stifled hiring for many firms; many companies have eliminated positions, consolidated employee responsibilities or look to contract labor. Economic policy uncertainty caused by 2007 recession lead to an increased unemployment rate. Research shows that unemployment was an estimated 1.3% higher due to economic uncertainty in 2012. This estimate is based on trends from ten years before the economic decline. Essentially uncertainty accounted for 1.3% of the unemployment rate, with the high level of uncertainty removed, unemployment would have been closer to 6.5% as opposed to the actual 7.8% (Leduc and Zheng). The graph above shows the correlation between job vacancy and unemployment. Naturally before the recession as unemployment decreased, the number of job openings decreased. After the recession even though job openings increased, the rate of unemployment decreased at a lower rate. Due to the level of uncertainty organizations tend to use the ‘permanent temp’ philosophy, keeping temporary or contract workers on board for longer stints until there is more stability in the market.
Appendix B

The graph above highlights the relationship between the level of policy uncertainty and hiring trends. Policy uncertainty was determined by several key factors: the number of articles discussing policy uncertainty, the number of tax provisions expected to expire, government spending, and inflation. In lower periods of uncertainty the level of recruiting intensifies, inversely as the level of policy uncertainty increases, there is a significant decline across industries for hiring and recruiting.

Appendix C

The temporary staffing industry has increased by 65 billion dollars since 1995. In June 2014, there was an 8% spike in temporary jobs (10,100 positions) from the year prior (Lockwood). A total of 2.7 million people held temporary positions in July 2014, which is an increase of close to 200,000 positions from July 2013 (Luhby). Due to the uncertainty of the economic market, fiscal policy, and political and tax reform companies look for flexibility in their labor force. Organizations are leaning towards temporary labor to avoid providing healthcare or facing potential penalties. The need for flexibility is especially critical in the manufacturing and IT industries. The manufacturing industry specifically staffs accordingly based on peak seasons. In an attempt to run as lean as possible manufacturers will increase labor for a three to four month stint for a particular season or quarter. The IT industry has also seen an influx in temp labor, approximately 19% of temp staffing is made up of IT related positions (Lockwood).

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