'Flexible' economy is buoyant, also harsh

When a customer needed a truckload of a special solvent used in car paints and cleaners last Monday, Eastman Chemical Corp. was ready.

The order arrived into Eastman's website at 10:15 a.m. Within 45 minutes it was checked for availability and pricing and forwarded to a nearby plant. A tanker truck was at the plant by 3:30 p.m., and was loaded and on its way by 6:30 p.m.

Thanks to efficiencies like this, many economists see the American economy today as more flexible and resilient.

Federal Reserve Chairman Alan Greenspan, for one, has said the recent recession was softened by the kind of flexibility seen in Eastman Chemical's quick turnaround times.

But the new flexibility also carries risks. Some of the very factors that Mr. Greenspan credited for the economy's remarkable performance – deregulation and innovative financing arrangements – were involved in the collapse of Enron Corp. And as at Enron, it is often rank-and-file workers, not just investors, who face the negative consequences.

"What is good for business is not always good for people," says Thomas Palley, an economist at the AFL-CIO in Washington. "Job tenure is more insecure."

Indeed, companies now adjust rapidly to economic shifts, such as slowing sales. They not only slow or stop production, but quickly lay off workers.

On the positive side, this helped companies maintain the pace of worker productivity and stay financially fit.

Greenspan testified that as firms "moved aggressively to stabilize cash flows by trimming workforces ... [they] ultimately helped to preserve the vast majority of private-sector jobs."

But to Mr. Palley, the Fed is "bailing out business, but never willing to bail out people.... It is increasingly interested in business and banks and less concerned about working families."

The workers most prone to quick dismissal are "contingency" workers – temporary help, contract workers, part-time workers, consultants, and so on.

Their numbers have grown in recent years as businesses sought to reduce costs and gain flexibility. Depending on how they are defined, they number 2.3 million to 5.4 million, according to the US Bureau of Labor Statistics. That's out of a total labor force of 135 million.

Though only a tiny part of the workforce, temporary employees account for almost half of the 1.1 million net jobs lost in the US economy since the end of 2000.

Manufacturers and service firms rely increasingly on these contingency workers.

It gives them "a margin of adjustment," so they can trim their payrolls without cutting permanent staff, says Katherine Abraham, a Bureau of Labor Statistics commissioner until last fall.

Jobs in general "are less secure than they were 20 or 30 years ago," says Jeff Faux, president of the Economic Policy Institute in Washington. "The downside of that is that you have less loyalty between workers and employers. One person's flexibility is another person's insecurity."

Advocates for workers, such as the AFL-CIO, argue that contingent workers should receive the same health and pension benefits that are provided staff employees. "These temp workers are still employees," says Palley. "Employers should not be able to shirk their responsibility to them."

Another way firms have attempted to make their wage costs more flexible is to make greater use of bonus pay, profit sharing, 401(k) contributions, and stock options as part of compensation. These can be quickly trimmed or cut entirely when profits dive.

"It's better than getting laid off," says Richard Freeman, an economist at Harvard University, Cambridge, Mass. "It is wage insecurity," not job insecurity.

Some observers attribute the new penchant for speedy wage-cost cuts to a managerial focus on keeping share prices up.

"There is a lot of pressure on managers to be harsher on their employees – pressure from Wall Street and their financiers," says Mr. Faux. By contrast, he says business schools teach students the value of a long-term approach to managing a firm, including building employee trust.

David Huether, chief economist of the National Association of Manufacturers in Washington, says companies aren't simply caving in to investor pressure. Layoffs, he says, are the last measure a firm takes – "a matter of necessity, rather than hardness."

"Employees are a valuable asset," he says. Firms spend a lot of money to keep their workers familiar with modern technology.

Manufacturers did show new flexibility in cutting inventories rapidly in the last four months of 2001, notes Mr. Huether. But he's not sure this will make their business rebound more quickly now, because of "global restraints." The strong dollar and weak economies abroad make it more difficult for US firms to export, and adds to import competition.

Nonetheless, Huether regards the American economy as more flexible than those of Europe or Japan. He predicts that, despite the new resiliency in the economy, it will recover at about half the usual 6 percent annual rate. Several other economists see a 5 percent rate of recovery.

The spread of two-income families and of home-equity loans may also have helped the economy show more resilience, Palley figures. If one spouse is laid off, the family still has an income. Some borrow against their home equity to manage, despite the risk of losing their home.