Employer Labor Hoarding Part I:What is it?

Labor hoarding is a concept where employers hold onto workers during economic down times even though they don’t necessarily need them. The idea is that the cost of retraining employees is sufficiently high that it is more cost-effective for employers to retain employees even though they are under utilized.

Initially the concept of labor hoarding was used to explain an apparent contradiction in the economic literature.

The economic contradiction was that during economic expansions employers would not necessarily hire more people. Also it was observed that employers were not necessarily releasing employees when downturns occurred.

This observation also led to a apparent contradiction in the labor economic literature.

According to labor economic literature the average productivity of labor should increase during slowdowns and recessions. The fall of average productivity theoretically, would occur because firms would reduce their labor force during recessions and employees essentially would do more with less during economic contractions.

So for example, delivery workers would be assigned to additional routes during a contraction and instead of having two people cover two routes, the routes would be consolidated so that only one person would be needed.

Since the production level is the same (or least falling at a slower rate than the decline in workers) and the number of workers declines, the average productivity of labor would increase. Alternatively the marginal productivity of labor would increase since fewer workers are needed. (Recall, that there is a inverse relationship between the marginal productivity of labor and the number of workers.)

So what does the current economic literature say about labor hoarding?