The Economy's Good News: The Upside of Downsizing

Policy Backgrounders | Economy

No. 146
Wednesday, February 25, 1998
by W. Michael Cox & Richard Alm

Downsizing in Microcosm: Smaller but More Productive

Table II - Downsizing and Productivity Among the Top 10 Corporate Job Cutters

"Worker productivity at the top 10 job cutters grew nearly 5 percent per year, compared to about 1.5 percent in the overall economy."

A selection of recent downsizings will help illustrate in microcosm what's happening behind the handwringing and headlines. Table II presents a sample of 10 large U.S. companies that have shed labor, each mentioned repeatedly in accounts of America's layoffs.11 In total, they jettisoned almost 850,000 workers between 1990 and 1995. All of these companies employ fewer workers today than five years ago; thus the layoffs appear to be permanent. The companies and others like them are the ones criticized as hard-hearted and uncaring. As the table shows:

  • After adjusting for inflation, the collective output of all 10 firms was down 9.7 percent.
  • The companies used 34.4 percent fewer workers, however, so output per worker surged nearly 25 percent, or 5 percent a year.
  • Thus their performance greatly exceeded the economy's average annual productivity gain of roughly 1.5 percent.12

Since rising productivity plays a vital role in rising living standards, it is incongruous to celebrate productivity gains yet denigrate downsizing.

That's not all. With the exceptions of Sears and Boeing, the companies in Table I emerged from downsizing more competitive and thus more likely to survive. Those who want to identify "good" firms and "bad" firms should take note: if firms don't survive, nobody has a job.

"Today's unemployment rate is 4.7 percent and the economy has added nearly 11 million new jobs, net of those destroyed."

More often than not, Wall Street approves of hard-nosed decisions to downsize as companies become more profitable and stock prices rise. Indeed, stock price gains among the companies listed in Table I averaged more than 130 percent from 1990 to 1995, compared to 86 percent for the S&P 500 companies overall.13 Investors should celebrate the gains. But what about the 850,000 employees who were cut? In a complex economy, there is no way to track each individual worker, but clearly most found jobs elsewhere. Today's unemployment rate of 4.7 percent is below that of 1990, and the economy has added nearly 11 million new jobs, net of those destroyed, in the past five years.

Many displaced workers are moving to new jobs in sectors of the economy that need labor in order to expand. As displaced workers take new jobs, they add to U.S. economic output. A precise calculation of their contribution is impossible, but suppose in their new jobs, the displaced workers produce the average output of an American worker - roughly $58,000 a year. In that case, the 850,000 workers from just 10 downsizing firms would have increased the country's GDP by $49 billion by moving from jobs where they were no longer needed to jobs where they are contributing to the national output of goods and services.

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