Exporting Myths

According to a recent report in Newsweek: “In the last decade layoffs have become America’s export to the world.” It’s a quick and dirty way for businesses to cut back on expenses, but like many quick fixes it conceals a host of unintended costs.

The author of the report, Dr. Jeffrey Pfeffer, Professor at the Stamford Business School, goes on to write: “At a conference in Stockholm a few years ago, business executives told me that to become as competitive as America, Sweden needed to make it easier to lay people off. In Japan, lifetime employment, which never applied to most of the labor market, is under attack. There are daily calls for European countries to follow the U.S. and make labor markets more ‘flexible.’ But the more you examine this universally accepted tactic of modern management, the more wrongheaded it seems to be.” (See, “Lay Off the Layoffs”)

In some cases, of course, layoffs are justified by serious long-term declines in business activity. But Newsweek noted: “these staff reductions were a response to a temporary drop in demand; many of these firms expect to start growing (and hiring) again when the recession ends.”

That may be because management sees other advantages to firing workers. With a reduced workforce, they can put in place automated systems or robots. They can restructure, pile the work on others without increasing any wages, and they can outsource to other countries where labor is cheaper.

On the other hand, the conventional wisdom of managers may well be entirely wrong. “There is a growing body of academic research suggesting that firms incur big costs when they cut workers.”

“University of Colorado professor Wayne Cascio lists the direct and indirect costs of layoffs: severance pay; paying out accrued vacation and sick pay; outplacement costs; higher unemployment-insurance taxes; the cost of rehiring employees when business improves; low morale and risk-averse survivors; potential lawsuits, sabotage, or even workplace violence from aggrieved employees or former employees; loss of institutional memory and knowledge; diminished trust in management; and reduced productivity.”

And the benefits are often illusory: “contrary to popular belief, companies that announce layoffs do not enjoy higher stock prices than peers—either immediately or over time…. Layoffs don’t increase individual company productivity, either. A study of productivity changes between 1977 and 1987 in more than 140,000 U.S. companies using Census of Manufacturers data found that companies that enjoyed the greatest increases in productivity were just as likely to have added workers as they were to have downsized. The study concluded that the growth in productivity during the 1980s could not be attributed to firms becoming “lean and mean.”

“Another myth: layoffs increase profits…. An American Management Association survey that assessed companies’ own perceptions of layoff effects found that only about half reported that downsizing increased operating profits, while just a third reported a positive effect on worker productivity.

The facts seem clear. Layoffs are mostly bad for companies, harmful for the economy, and devastating for employees.

Why then does the myth of layoffs have such force? I suspect that management increasingly views workers as their least desirable, most troublesome cost. Not only are workers less reliable than automated systems, and less adaptable, unlike machines they resist change and often fight back. They can undermine new initiatives that make them anxious and expose them to failure. Moreover, they require recognition for their achievements. Worst of all, they seek financial security in the form of higher wages, health care benefits, and pensions.

Managers are human too, of course, all too able to understand what workers want and why. But this only makes them more likely to seek alternative ways of getting work done — and to believe that it makes common sense to economize by downsizing.

(I’m indebted to Prof. Howard Stein at the University of Oklahoma for calling my attention to the Newsweek essay.)