How layoffs hurt companies
Presented here for discussion is a summary of a current article published with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.
Time was, layoffs were seen as an emergency strategy, the last resort in a downturn or crisis. Today, however, layoffs are a standard tool for doing business. As the economy continues to heal and job indicators improve, a number of firms have announced a fresh wave of layoffs — Nordstrom, Sprint and American Express among them — citing the need to improve profitability.
Layoffs offer a short-term fix to boost profits, often influenced by Wall Street pressures. But the increasing rate of layoffs also reflects the new economy.
“In Silicon Valley, the big thing is to be disruptive,” says Wharton management professor Matthew Bidwell. “What does that mean? Laying people off. A lot of these layoffs reflect that. As new forces come in, some jobs go away.”
Yet several decades’ worth of research have shown that layoffs do not generally result in improved profits.
According to a Harvard Business School working paper, “The Effect of Labor on Profitability: The Role of Quality” by Zeynep Ton, stores that cut staff were unwittingly cutting profits, and yet the practice was standard. Why? “An emphasis on minimizing payroll expenses and an emphasis on meeting short-term (often monthly) performance targets,” the study found. Another consequence of understaffing at this retailer was lowered morale, a finding echoed in other studies.
Employers also often underestimate the cost of layoffs in immediate financial terms, as well as in the lingering burden it places on remaining resources — both financially and emotionally. Companies also often face extra hiring and training expenses once business picks up.
While layoffs are sometimes necessary, before taking that step, companies might consider offering early retirement, slowing down hiring and retraining workers.
However it plays out, there’s a fundamental tension underlying the interplay of forces, about which Mr. Bidwell admits feeling conflicted. “The individual wants stability and security, but as a society we worry about becoming too sclerotic,” he notes. “One person’s dynamic economy is another person’s risk and insecurity. And the question is where we strike the balance between them.”
Should layoffs be avoided except in emergency situations or has that changed with the new economy? During challenging periods, are retailers too quick or slow to initiate layoffs versus other industries?