Labour Hoarding

Labour hoarding means that firms retain workers during a temporary fall in product demand, even when fewer workers would suffice for current production. Employment therefore falls less than output because firms expect demand to recover and consider retaining workers less costly than dismissing and later replacing them.

Why firms retain workers

Labour cannot always be adjusted quickly or without cost. Firms weigh the immediate expense of keeping underused workers against the adjustment costs of reducing and subsequently rebuilding their workforce.

• Dismissal can involve separation costs, while recruiting and training replacements require time and resources.
• Retaining experienced employees preserves firm-specific skills that replacements may not possess.
• Labour hoarding is more attractive when firms expect the demand decline to be brief rather than permanent.

How production and employment adjust

Instead of reducing headcount proportionately, firms may cut overtime or working hours, or allow workers to be temporarily underutilised. Consequently, output per worker can fall during the downturn even without any loss of workers' skills.

• When demand recovers, firms can increase production using retained workers before undertaking substantial new hiring.
• Employment adjusts less sharply than output, cushioning workers against temporary fluctuations in demand.

The economic trade-off

Labour hoarding provides employment stability but imposes a short-run cost on firms because labour expenses do not fall proportionately with production. If weak demand persists, continued retention becomes harder to justify, and firms may eventually reduce employment.