Economic Influences on Human Resources

HSC Business Studies | Free Study Notes

Economic influences on human resources are the ways changes in the economy affect how businesses manage employees. In HSC Business Studies, this topic sits within Topic 4: Human Resources and helps explain why businesses change staffing levels, wages and employment strategies as economic conditions change.

When the economy is strong, businesses may need more employees to meet demand. When the economy slows, businesses may reduce hiring, cut hours or restructure their workforce.

In this lesson

• what economic influences on human resources are

• how the economic cycle affects HR decisions

• how labour demand changes

• how unemployment affects businesses and employees

• how wages and staffing decisions are influenced by economic conditions

Core notes

What are economic influences on human resources?

Economic influences are changes in the broader economy that affect business decisions.

In human resources, economic influences can affect:

• how many employees a business needs

• whether the business hires new staff

• whether employees receive wage increases

• the availability of skilled workers

• training decisions

• redundancy or retrenchment decisions

• the type of employment contracts used

Human resource managers need to respond to economic conditions so the business has the right number of employees at the right cost.

This links closely with strategic role of human resources [Strategic Role of Human Resources], because HR decisions should support long-term business goals.

The economic cycle

What is the economic cycle?

The economic cycle refers to the movement of the economy through periods of growth and decline.

The main stages include:

• boom

• upswing

• downswing

• recession

Each stage can affect human resource management differently.

Boom and upswing

During an upswing or boom, demand for goods and services usually increases. Businesses may become more confident and may need more employees to meet higher levels of demand.

HR decisions during stronger economic conditions may include:

• hiring more staff

• increasing working hours

• offering higher wages to attract workers

• investing in training

• using rewards to retain skilled employees

• expanding teams or departments

For example, a construction business may recruit more workers during a period of strong economic growth because more customers are building homes.

Downswing and recession

During a downswing or recession, demand for goods and services often falls. Businesses may need to reduce costs, including labour costs.

HR decisions during weaker economic conditions may include:

• reducing working hours

• slowing recruitment

• freezing wages

• using casual or part-time workers

• reducing training spending

• making employees redundant

• restructuring roles

For example, a retail business may reduce casual shifts if customers are spending less.

This connects with separation [Separation], because economic downturns may lead to redundancies or retrenchments.

Labour demand

What is labour demand?

Labour demand refers to the number of workers businesses are willing and able to employ.

Labour demand depends on factors such as:

• customer demand

• business growth

• production levels

• technology

• labour costs

• economic confidence

• industry conditions

If customer demand rises, businesses may demand more labour. If customer demand falls, businesses may need fewer employees.

Labour demand and HR planning

Human resource managers need to plan for changing labour demand.

For example:

• a café may hire more staff during a busy tourist season

• a manufacturer may employ more workers when orders increase

• a business may reduce staff numbers if sales fall

• a technology change may reduce demand for some roles but increase demand for skilled technical workers

This links with interdependence of human resources with other business functions [Interdependence of Human Resources with Other Business Functions], because HR decisions depend on changes in operations, marketing and finance.

Unemployment

What is unemployment?

Unemployment occurs when people who are willing and able to work cannot find a job.

Unemployment can influence human resource management because it affects the supply of labour available to businesses.

High unemployment

When unemployment is high, more people are looking for work. This can make it easier for businesses to find employees.

Possible effects of high unemployment include:

• a larger pool of job applicants

• less pressure to increase wages

• lower staff turnover

• more competition for jobs

• increased employer choice when recruiting

However, high unemployment can also reduce consumer spending. This may lower demand for a business’s goods and services, causing the business to reduce staffing levels.

Low unemployment

When unemployment is low, fewer people are looking for work. This can make it harder for businesses to recruit suitable staff.

Possible effects of low unemployment include:

• skill shortages

• pressure to increase wages

• more competition between employers

• greater need for employee retention strategies

• increased training of existing staff

For example, if a business cannot find enough skilled workers, it may need to improve rewards, offer flexible work or invest in training.

This connects with recruitment strategies [Recruitment Strategies], because labour market conditions affect how easy it is to attract suitable employees.

Wages

How economic conditions affect wages

Wages are influenced by economic conditions, labour demand and the availability of workers.

When the economy is strong and labour demand is high, businesses may need to offer higher wages to attract and keep employees.

When the economy is weak and unemployment is high, wage growth may slow because there are more people looking for work.

Wage decisions in HR

Human resource managers need to balance wage costs with the need to attract and motivate employees.

Wage decisions may affect:

• employee motivation

• staff retention

• recruitment success

• business costs

• profitability

• competitiveness

For example, a business may offer higher wages to retain skilled employees during a labour shortage, even though this increases expenses.

This links with rewards [Rewards], because wages are a monetary reward used to attract, retain and motivate employees.

Staffing decisions

How the economy shapes staffing decisions

Staffing decisions involve choosing how many employees the business needs and what types of employment arrangements are most suitable.

Economic conditions may influence whether a business uses:

• full-time employees

• part-time employees

• casual employees

• contractors

• temporary staff

• redundancies

• overtime

• reduced hours

During strong economic conditions, a business may recruit permanent staff to support growth. During weaker conditions, it may rely more on casual staff or contractors to maintain flexibility.

Examples of staffing decisions

A business may:

• hire extra staff when sales are rising

• reduce shifts when customer demand falls

• freeze recruitment during uncertain economic conditions

• train existing employees instead of hiring new staff

• use contractors for short-term projects

• make some roles redundant during a recession

These decisions need to support both business performance and employee wellbeing.

Why economic influences matter for business performance

Economic influences affect how well a business can manage its workforce.

Effective responses to economic conditions can help a business:

• control labour costs

• maintain productivity

• attract skilled employees

• retain valuable staff

• respond to changing demand

• reduce unnecessary staffing costs

• support long-term survival

Poor responses can lead to problems such as overstaffing, understaffing, low morale, high turnover or reduced competitiveness.

For example, if a business fails to recruit enough staff during a period of growth, customer service may decline. If it keeps too many staff during a downturn, labour costs may become too high.

Worked example

Exam-style question

Explain how a recession may influence human resource management in a business.

Sample answer

A recession may influence human resource management because customer demand often falls during weaker economic conditions. If a business earns less revenue, it may need to reduce labour costs by cutting employee hours, freezing recruitment or making some positions redundant.

A recession may also affect wages. When unemployment is higher, there may be less pressure for businesses to offer wage increases because more people are looking for work. However, the business still needs to maintain employee morale and performance, so HR managers must balance cost control with fair treatment of employees.

Common mistakes

• Saying the economy only affects finance, not human resources.

• Forgetting that economic conditions affect both hiring and wages.

• Confusing labour demand with customer demand.

• Assuming high unemployment is always good for businesses.

• Writing about recession without linking it to staffing decisions.

Quick quiz

1. What is the economic cycle?

2. How might a boom affect human resource management?

3. What is labour demand?

4. How can high unemployment affect recruitment?

5. Why might a business reduce staffing levels during a recession?

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