Economics of Layoffs

Factual Questions
1

My company announced today they’re laying off 2 percent of their work force, about 700 people. Not a big shock. I work in the newspaper business, which is in a freefall, and we’ve been through several rounds of layoffs in the last 18 months.

I’m in my 40s, have had five or six different employers, and I’ve been through layoffs before. It seems to me that layoffs give you a short term boost by cutting costs, but that in the long run the costs outweigh that. To say nothing of the impact it has on morale, causing good workers with better options to jump ship and forcing the remaining workers to do more with less.

My GQ question is this: is there anything in management theory or economics that suggest layoffs are a sound strategy in the long run?

2

You need to cut costs or raise revenues. If you can’t do the latter, the former is pretty much a requirement. There is always some collateral damage from layoffs (lower morale, increased attrition) but those can be factored into the equation. Doing nothing is not an option; what would you propose otherwise?

3

I have not studied this formally in an academic environment but I have been in management for 25 years and have a Masters from the School of Hard Knocks.

Layoffs are seen as just short of desperation. You can’t sustain losses if your revenues are down, so you have to cut costs, and that’s the fastest way to do it. If your revenues continue to drop, it could be the first step to going out of business. But many business have layoffs then later restaff in response to business or economic cycles.

Doing more with less is exactly what they’re trying to do. Losing good workers is generally accepted the same way that civilians deaths are accepted during war, as unfortunate but unavoidable.

In terms of pure cost efficiencies, yes, it would be better to hang on to your experienced people through the bad times and then enjoy a quick recovery when your business bounces back, but in reality many businesses can not tolerate the negative cash flow that this strategy would require, especially a publicly traded company with stockholders that don’t ever want to see quarterly losses. Stockholders, especially stockholders in the year 2011, don’t often value long-term efficiencies and prefer short-term profit.

4

There isn’t any theory needed for some types of layoffs. If revenue starts falling and is likely never going to come back like in the traditional newspaper industry, you may have to cut payroll so that you can continue to meet it. That is a legal requirement and not optional. You can cut payroll by cutting pay for everyone or by laying off some people. Paycuts across the board tend to alienate all employees especially if multiple rounds of cuts are needed over time so it may just be best to reorganize workloads and trim the workforce selectively.

5

I no longer believe that companies use layoffs as a last resort. I believe that the appeal of low-cost non-union offshore labor makes layoffs a simple solution to a lot of companies looking to improve their profits.

6

Indeed, there seems to be a growing trend away from the concept of a “permanent staff” in favor of project and contract employees, subcontractors and outsourcing non-core functions to make it easier for them to grow or shrink as conditions require.

7

The USA also has a unique position in that it has significantly less “separation pay” requirements than many other countries.

In Canada, for example, you usually give (rule of thumb, up to the courts to arbitrate) 2 weeks to a month’s pay for each year of service. Legal minimum is 2 to 3 weeks. The number gets close to a month per year’s service depending on pay level, ease of finding a new job, amount of specialization in job, employee age, etc. The employer has the alternative of giving notice and requiring you to work during that notice instead. (Surely an invitation to significant productivity - “your job is gone in 6 months, could you wrap up these projects before you leave?”)

Layoffs, obviously, cut costs. The real question is whether the leftover employees can still do the same job. IBM was notorious back in the 80’s and 90’s for the trick of requiring each department to rank all their works from best to worst before telling them wat the magic number was. The question is, would this be false economy? The presumption with layoffs is that there is slack - either the workers are not meeting their potential, there wasn’t enough work, or due to declining business there is not enough work any more. If your employees are working flat out and losing some cuts into the amount of deliverables, then it is a false savings.

Of course in the newspaper business, handwaving is always a substitute. Instead of paying a fulltime writer, run AP or UPI content, run in-depth articles that already ran in the New York TImes or wherever. Paying by the article is often cheaper than a full-time staff; plus for local, you can probably get that writer to work for you piecework.

If you can convert these sort of jobs to contract work, then - the saying is that with SS, pension, and medical and other benefits, the actual cost of an employee is roughly 50% more than their salary. If you can make thema contractor, only pay for results, go cheap with your desperate ex-employees and pay even less on contract than they used to earn as employees… your savings short term will be good.

Long term, the best will skip out to better, more stable employers.

the downside with union work - car makers, etc - is that the union contract dictates you must lay off in order of seniority - so your youngest, newest employees go first. You then have your old employees retiring after you’ve scared off the young ones. OTOH, if you offer retirement incentives instead, all the oldtimers sit around waiting for the next time you make an offer.

8

If the revenues are falling and you keep responding by cutting costs rather than increasing revenues, it’s a dead end death spiral isn’t it? At some point, you’ll balance the books by cutting your costs down to zero.

Cutting costs this way may please the shareholders in the short term (and our CEO got a bonus last year for implementing layoffs), but when you cut workers it almost always impacts your ability to generate revenue. At some point, you have to address the revenue issues to grow, don;t you?

Maybe there’s no hope for the newspaper business, but I’ve been through the same experience in other sectors. I can’t think of an example of a company cutting its way to prosperity.

9

General Motors?

Granted, they also made significant changes to development, product, and financials, but cutting their employees was a big part of the process. They are a leaner, meaner company now and better suited to being successful.

10

In America today there is so much dead wood. In the 90s, employment was everywhere and you could demand a good deal. Now these people with those good deals are way overpaid.

For example, I worked for a temp agency in 2005 to get extra money and made $15/hr to put data into an Excel spreadsheet. I worked for the same agency for the same company last year and made minimum wage (It was $8/hr at the time).

As you can see the value of that job fell in half in less than five years.

I was an asst controller for a hotel. When I go for jobs, I’m usually competing against controllers NOT asst controllers. And while I was pulling in 50K in 2004, these jobs are now being advertised at mid 30s.

So wages really have fallen. Companies are full of deadwood and jobs that could be performed by one person but aren’t. Why not? Because they were filled years ago, when companies had no choice. Workers had the upper hand. Now businesses have the upper hand.

They can and they are demanding more work for less pay.

It’s just an economic adjustment that happens from time to time. Eventually things will get better and workers will be in a position to demand better, and they will

11

Presumably, at some point economic factors change and revenue starts to go back up…otherwise, yeah. The company goes out of business. They go out of business quicker if they don’t at least make the attempt to cut costs.

As others have said…either you cut costs or increase revenue. It’s as simple as that. In the case of your company, do you have any thoughts on increasing revenue for the company which would put the company back in the black AND save those jobs? If so, you should go to management with them and present your ideas. You might get a nice raise out of it.

It depends. Is your company viable, long term? Is it just having short term revenue issues due to the large downturn in the economy? If so, then cutting costs, including layoffs would be an acceptable short term solution to running in the red. If the company isn’t viable then it really doesn’t matter except to stave off the inevitable…you are ALL going to lose your jobs, since the company is going to go under.

As for the CEO getting a bonus for the layoffs, perhaps the bonus was for keeping the company from going completely tits up? If they were headed towards complete economic failure and policies the CEO and staff implemented prevented that (including the layoffs), then a bonus perhaps makes sense. Or, perhaps the CEO is just a good friend of the board. You never know.

I can think of plenty of examples of companies who went through a layoff/re-hire cycle and were prosperous when economic conditions changed. I’ve worked for several companies who have done this. I can’t think of any company who has been successful by NOT laying folks off when they had to cut costs, not unless they were able to figure out some other way to address revenue shortfalls and increase revenues some other way. Like I said, if you have an idea how your company could keep all it’s current staff and increase revenues then you should definitely present that idea to management.

-XT

12

A company doesn’t cut its way to prosperity, but it can be saved by cuts in at least two ways that I can think of:

  1. There are two product lines. One is profitable and the other is not, for whatever reason. Cutting the unprofitable line immediately puts the company back in the black. If you cut your expenses by 1/2 and only cut income by 1/4, you’re ahead of the game. Some unprofitable lines are just plain losers that have to be cut eventually - for example, the proverbial buggy whip manufacturer cannot grow revenue by simply trying to sell more buggy whips.
  2. A company’s revenue is reduced because people are buying less of x. (In the current economy, x could be houses, cars or many luxury products). When the economy recovers, people will return to buying more x, but in the meantime, nothing the company does is really going to restore the demand for x. If the company doesn’t lay off workers, it may not exist when the future for sales of x is brighter - even if it does exist, it might have incurred so much debt to keep unneeded workers that it spends the rest of the recovery just trying to dig out of the hole it created.
13

It’s not just union vs. non-union. Moving jobs overseas has tax implications, and also the wages will be lower, although I would argue that they are still shooting themselves in the foot by demoralizing and overburdening their remaining onshore employees.

p.s. – This does not apply to the newspaper industry, however!

14

They still do it.

15

A firm that I worked for had big loans (a leveraged buyout) that included a profitability clause. If they did not meet a certain percentage profit, the loan could be called.

They would do layoffs to raise the profit percentage.

16

If you could wave a magic wand and increase revenues, you would. You can wave a magic wand and decrease costs, so you do.

17

While a newspaper may only need a few less people as circulation and advertising drops, they have the money to pay a lot less. You can only retain the people you can pay.

18

Sorry if this sounds naive – I’m not an economist, obviously – or I missed it above, but I’ve always wondered about the payouts required by law. If a company lays off a large number of workers, the severance pay could be a lot. Over here, labor law is actually taken seriously, and there have been instances of massive layoffs where many, many employees end up getting close to a year’s pay. If a company has to pay so much at one time, why wouldn’t it be cheaper in the long to reduce staff through natural attrition, especially since there could be an economic turnaround in the short to medium term?

19

I have to wonder two things -

  1. With regards to the plummeting newspaper business - I can’t imagine why the online transition isn’t MORE profitable - one would think advertisement would be bringing in equal income whereas physical costs in terms of printing on paper would be drastically cheaper. Unless advertisement in print was always over inflated in value, and now that people can actually measure click-throughs they realize that advertisement isn’t actually all that worthwhile.

  2. When you layoff people - are they people who didn’t have much work to do? It seems weird to me to have mass lay offs rather than gradual lessening of the work force (or repurposing) as work drops off. Especially in the case of a transitioning business - if you merely need different type of workers with different skills, this seems more like a gradual thing to me than a sudden massive change.

Personally, I started out in a start-up of 6 people and I was sort of a jack-of-all-trades. When the company expanded to 40 people, my job was still the same but obviously more involved given the expansion. Rather than repurpose me I got laid off, but I took great satisfaction due to the fact that it took several people to replace me.

20

Al Dunlap did exactly that to Scott Paper company in 1994/1995. He increased profits there 225% (bringing the stock price from $37.35 to $84.62), all by shutting down plants, firing almost 11,000 people, and divesting of corporate brands that didn’t fit in with his vision of the company.

In the end of 1995, the new Scott Paper company was so attractive, Kimberly-Clark bought them out lock, stock, and barrel.

Al Dunlap might be nasty, but he does have an interesting record.

(cite: Scott Paper Company History )