The external environmental factors described in the following essay have a direct or indirect influence on HRM. To be effective, HR managers must monitor the environment on an ongoing basis; assess the impact of any changes; and be proactive in implementing policies and programs to deal with such challenges.
The economic environment has a major impact on business in general and the management of human resources in particular. Economic conditions affect supply and demand for products and services, which, in turn, have a dramatic impact on the labour force by affecting the number and types of employees required, as well as an employer's ability to pay wages and provide benefits.
When the economy is healthy, companies often hire more workers as demand for products and services increases. Consequently, unemployment rates fall, there is more competition for qualified employees, and training and retention strategies increase in importance. Conversely, during a downturn, some firms reduce pay and benefits in order to retain workers.
Other employers are forced to downsize, by offering attractive early retirement and early leave programs or by laying off and terminating employees. Unemployment rates rise, and employers are often overwhelmed with applicants when vacancies are advertised.
In most organizations today, productivity improvement is essential for long-term success. Through productivity gains, managers can reduce costs, conserve scarce resources, and increase profits. This leads to a win-win situation, since higher profits often result in better compensation and improved working conditions, thereby enhancing the employees' quality of work life and their motivation to further improve productivity.
Australia's relatively low productivity growth rate and high labour costs are of grave concern, since competition with foreign companies has become increasingly important. Australia's economic success increasingly depends on the ability of Australian employers to meet international quality and productivity standards and become...