The Economy's Good News: The Upside of Downsizing

Policy Backgrounders | Economy

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


  1. An earlier version of this backgrounder was published as W. Michael Cox and Richard Alm, "The Upside of Downsizing," Southwest Economy, November/ December 1996, Federal Reserve Bank of Dallas.
  2. Compiled from various news reports by the authors.
  3. "Worker Displacement During the Mid-1990s," U.S. Department of Labor News, August 22, 1996.
  4. Beth Belton, "70 percent of Workers Feel Less Secure About Jobs," and "Downsizing Leaves Legacy of Insecurity," both USA Today, August 29, 1997. The poll was conducted in mid-July 1997.
  5. Job openings data are monthly averages for 1993-95 and are the most recent available.
  6. Council of Economic Advisers, "Job Creation and Employment Opportunities: The United States Labor Market, 1993-1996," a report from the Council of Economic Advisers with the U.S. Department of Labor, Office of the Chief Economist, April 23, 1996.
  7. Robert Reich, "Has Downsizing Gone Too Far?" Challenge, July-August 1996, pp. 4-10.
  8. Per capita personal income and total compensation deflated using the CPI-UX1 consumer price index. See W. Michael Cox and Beverly J. Fox, "What's Happening to Americans' Income?" Policy Backgrounder No. 138, January 29, 1996, National Center for Policy Analysis. Regarding the role of the consumer price index, see Boskin Commission, "Toward a More Accurate Measure of the Cost of Living: Final Report to the Senate Finance Committee." Advisory Committee to Study the Consumer Price Index, December 4, 1996.
  9. U.S. Chamber of Commerce, "Employee Benefits Historical Data 1951-1979" and "1996 Employee Benefits Report."
  10. Beth Belton, USA Today.
  11. By and large, the companies reviewed here reduced their labor forces through layoffs rather than divestitures, although this distinction is not a critical one. Restructuring by any means - downsizing, divestiture, merger, acquisition, leveraged buyout and so forth - will typically have both employment and output effects for the firm, and thus can be investigated in terms of its effect on productivity.
  12. Productivity in this study is calculated as output per worker rather than output per hour, as it is typically measured.
  13. Moreover, at 3.13 percent, the dividend yield for the 10 stocks listed in Table I averaged more than that (2.88 percent) for the S&P 500 companies over the 1990-95 period. Reinvesting all dividends, a $100 investment at year-end 1990, spread equally across each of the 10 firms listed in Table I, would have grown to $269.16 (an average annual rate of 21.9 percent), as compared with only $214.95 (16.5 percent annually) for an S&P 500 investment.
  14. Federal Communications Commission, Statistics of Communications Common Carriers, 1994-95 (Washington, D.C.: U.S. Government Printing Office, 1995). At the same time jobs have been pared from this segment of the telecommunications industry, they have been added to others. Employment in the cellular telecommunications segment, for example, increased from 15,927 at the beginning of 1990 to 68,165 by the end of 1995, for a net gain of 52,238 jobs in six years.
  15. U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings, September and various issues, 1996. Hourly wages of telephone operators also grew at a pace one-third to one-half better than average during the 1990s. From 1990 to 1995, operators' hourly wages increased at an average rate of 4.04 percent annually, compared with only 2.66 percent for all other clerical workers and 2.91 percent for hourly employees as a whole.
  16. Figures are based on the amount of work time required for a typical manufacturing employee to afford a five-minute daytime residential call from New York to Los Angeles, calculated as the price of the call divided by average hourly manufacturing wages. For 1970 this calculation is ($2.25/$3.35) = 0.67 hours = 40.3 minutes, and for 1994 the figure is ($1.40/$12.06) = 7.0 minutes. Based on AT&T's new One Rate Plan (15 cents anytime, anywhere), the 1996 work time figure is 3-1/2 minutes.
  17. Data are the most recent available.
  18. One other important factor is the increasing tendency for firms to outsource such functions as payroll and accounting to smaller firms that can do them more efficiently.
  19. GDP and productivity (output per worker) growth averaged 1.5 percent and -0.1 percent, respectively, in Europe over the 1990-95 period, while in the United States growth averaged 2.5 and 1.5 percent, respectively.
  20. Reich, "Has Downsizing Gone Too Far?"

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