Unemployment on the rise? How does this impact my small business?

On 11 October 2012, The Age reported that the jobless rate in Australia continues to climb, reaching 5.4 percent in September. Perhaps not surprisingly, there was an element of sensationalism in the story — on digging deeper, it appears that when adjusted for changes in the participation rate, the trend is actually flat. But notwithstanding the statistics, what is the impact on small business in times of rising unemployment?

I awoke this morning to the news that a stalwart of country retail, Seymours in Blackall, Queensland, is closing its doors. This reminded me of my recent blog about how bricks and mortar retailers can compete with online retailers, since the primary reason cited for the closure was the pressure created by online stores. In fact, Queensland is the Australian state hardest hit by the latest jobless figures. The mining slowdown has helped lift unemployment in the Sunshine State to 6.3 percent.

So is rising unemployment a harbinger of dreadful years ahead? Surprisingly, it may not be — or at least, not according to the research of a United States agency, the National Bureau of Economic Research (NBER). According to the NBER, based in the academic hotbed of Cambridge, Massachusetts, it is not uncommon to see unemployment continue to rise after the end of a recession. (And whether or not we believe Australia has been in recession — technically, it has not, of course — there has certainly been an economic downturn.) In fact, NBER’s research on the previous US recession (2001) found that unemployment peaked 19 months after the official end of the recession.

Why should that be? I suspect it is because employers’ actions lag what is happening in the economy. In other words, people REACT to changes in circumstances. Perhaps counter intuitively, employers are behaving cautiously right now while the economy shows signs of picking up. What’s the old saying — once bitten, twice shy? As an economy stabilises and shows sign of growth, employers respond with caution and, in fact, according to the research, continue to shed jobs (or at least, do not replace people who leave) so that they have a tight ship in place for when the good times return.

Interestingly, there is some solid research that suggests that small business owners would do well to continue to invest in down markets. Professor Andrew Razeghi from the Kellogg School of Management at Northwestern University found that those businesses that invested in what he defined as ‘good costs’ during recessions were more than six times likely than those that did not invest to outperform their competition when the good times returned. Professor Razeghi defines ‘good costs’ as those associated with innovation, marketing and customer service. (He defines ‘bad costs’ as such things as manufacturing, general and administrative expenses.)

This reminds me of the age-old hypothesis of the guru of management, the late, great Peter Drucker, who continually reminded us that business is simple — it is innovation and marketing. In other words, create something great to sell, and then find a market and a smart way to get your product to that market. All else is ancillary. Of course, admin and accounting needs to be done, but it pays not to major on the minors. I love the fact that Professor Razeghi adds customer service into the mix — as you revisit my blog referenced above, you will note that a major strategy that I advocated was to continue to invest in service during difficult times.

READ: Six steps to a rapid innovation cycle

Another implication of rising unemployment for small business can be increased competition. Retrenched employees who have spent years ‘working for the man’ figure out that they could do a better job themselves, so they set up their own shop. This happens particularly in industries with low barriers to entry and low start up costs. For example, I do a lot of work with accounting firms. To set up your own accounting firm is not difficult, assuming you have the requisite qualifications. Of the 14,000 accounting firms in Australia and New Zealand, many are solo operators working from home or from a small serviced office. There is very limited capital expenditure required—just put up your shingle, and off you go.

So, if you are a small business owner worried about rising unemployment, here is my summary:

1. Take heart that despite appearances, rising unemployment may in fact be a signal that things are looking up in the economy.
2. Be very, very focused on the ‘good costs’ in your business—in particular, consider INCREASING expenditures on innovation, marketing and customer service. It is easy to stand out in a crowd where others are retreating, and it will stand you in good stead when the recovery kicks in in earnest. (If you don’t have the money right now to invest, at least invest your time in these key areas.)
3. Get closer to your customers so that in the event that you need to lay off senior people, you will mitigate customer attrition if they choose to set up in competition to you.
4. One bonus point: What niche can you find in your market that is currently not being addressed by you or your competition? Now is a great time to be thinking about and planning how you might take advantage of a new offering that others are neglecting.