December 5, 2023

The effect of rising interest rates on recruiting, explained.

Authors:

Partner at Hirewell. #3 Ranked Sarcastic Commenter on LinkedIn.

My Vox audition

Unless you lived under a rock this year, you noticed:

1. Interest rates shot up.

2. Hiring fell off a cliff. (At least in Office Dork circles.)

Lots of hot takes mentioned “zero interest rate phenomenon” and “the end of free money.” But I want to dig into how this translated to the boatload of unemployed, A+ internal recruiters. (Or how some agency recruiters’ commission checks tanked.)

My layman’s explanation aka what I learned from too many educational YouTube binges. (Yes, I’m fun at parties.)

👉High interest rates are good for savers. Bad for borrowers.

Duh. If you have money, it’s good. If you don’t, it’s bad.

People with money can park it in “risk free” investments. Treasury bills, high yield savings accounts, etc. Collect 5% interest for the first time in forever.

People without money? They borrow at higher rates. A mortgage at 7-8% is a kick in the junk compared to 2-3% rates a couple years ago.

👉Rich people have to put their money somewhere. 

High net wealth individuals and institutions (e.g. investment banks. Companies are people, too!) They don’t just put it in the places regular people do (stocks & their home.) They diversify to try to make money regardless of economic conditions.

Many of these investments have a high barrier to entry. Buying businesses, art, large real estate developments, etc. And for the purposes of this piece: venture capital & private equity.

👉You need a higher return when risk free rates aren’t zero.

Making an 8-10% yearly return in stocks is an easy call when risk free was 0%. But not when risk free is 5%.

The S&P 500 went nowhere over the last 2 years. (Down 18% in 2022, up 19% in 2023.) Wild swings. No gain. A 5% lock doesn’t look bad.

The same applies to venture capital. Investors know they’re taking moonshots. Most startups fail. A few strike it big. It’s an easy #yolo at 0%. But not at 5%. The rich will still invest in startups, but not as much.

👉Less VC investments mean less hiring. (And “easier” hiring.)

Another duh. Raising money means hiring to grow.

You’re probably saying “hey James, my firm isn’t a startup. We’re not spending on recruiting either. What’s up with that?”

Labor has its own supply & demand curve. The supply of workers is fairly fixed. But hiring demand can swing dramatically. When there’s a lot of tech hiring and limited tech workers, it creates scarcity of labor.

In that scenario, every firm (not just start ups) needs to spend more money to recruit. The whole “war for talent” everyone was buzzing about.

When hiring demand dips? Companies may hire less AND have an easier time doing it. With less recruiters.

Because of less competition.

👉Business loans are more expensive too.

This isn’t just about VC money. As debt is more expensive, people have a harder time affording loans to start a business or finance growth. Like taking on a new mortgage. 

Less business financing. Less hiring. Less recruiters.

Partner at Hirewell. #3 Ranked Sarcastic Commenter on LinkedIn.

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