Why businesses, finally, are starting to hire

Old Dominion Window and Door Co. just couldn't keep up with demand. First, the Richmond, Va., company bought machines that were supposed to take the place of three people. Then, it tried overtime. Now, it has doubled the size of its plant and expanded its workforce by 10 to 20 percent. And it's still not done: It will add another 15 or 20 workers this year. "We're just trying to keep up the orders," says Jim Greene, the general manager.

In some respects, Old Dominion epitomizes the US economy. For sometime, companies have been able to handle an expanding economy by either buying machines or squeezing more output out of workers in one of the more impressive productivity periods in American industrial history.

Now, however, the economy has expanded to the point where business has to hire more workers. That, in part, is what lies behind the strong growth in jobs the past two months. Last week, the Labor Department reported that businesses hit the "hire now" button, adding 288,000 new jobs and dropping the unemployment rate from 5.7 percent to 5.6 percent. This followed the addition of 337,000 jobs in February - a vast improvement over the tepid job gains of the past year. Economists expect the hiring trend to continue through most of the year.

The improving jobs picture also means the Federal Reserve can begin the process of raising interest rates, possibly as early as next month - after it gets yet another jobs report.

"We're seeing job growth because business has confidence in the expansion's longevity and strength, and companies simply stopped trying to squeeze whatever they could out of the workforce," says Richard DeKaser, chief economist at First National City Corporation in Cleveland.

The reduction in squeezing is evident in the numbers as well. Last week, the Labor Department reported productivity in the first quarter slowed to a 3.5 percent annual pace, down from the 4.4 percent improvement for all of 2003. "The first two years of an economic recovery are always the best for productivity, then things peter out," says Mr. DeKaser.

Old Dominion illustrates some of the dilemmas managers face in trying to decide whether to add workers. The new machines that the company bought still didn't keep up with demand, says Mr. Greene. But as he expanded overtime, he wondered if that was worthwhile. "After you're working someone 12 extra hours a week, you wonder if they are really that much more productive: You're taking them away from their families, and with the extra hours they are becoming tired and susceptible to injury," he says.

Federal Reserve chairman Alan Greenspan recently said he expects the efficiencies in the economy to slow as well. But hardly anyone has a good idea by how much or what that will mean, exactly. Recently, former Federal Reserve governor Lyle Gramley estimated that if productivity drops by 1 full percentage point, it adds 2 1/2 million jobs to the economy over the next two years.

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