NCPA - National Center for Policy Analysis

NCPA Backgrounder: Benefits Of Downsizing

February 25, 1998

Corporate layoffs regularly shake the U.S. labor market, and average and median wage growth has been slow. Some see this as evidence that workers aren't sharing in prosperity -- while corporate profits, the pay of chief executives and stock prices have risen to record levels.

But corporate downsizings are actually part of the good economic news of rising living standards, says a new study by Federal Reserve economist Michael Cox and business writer Richard Alm.

They point out that contrary to what is commonly assumed, most of these workers are rapidly reemployed, finding jobs as good as or better than those they lost.

  • Job openings average roughly 525,000 per month, more than double the typical monthly growth of the labor force.
  • Half of those who lose their jobs find another within six to eight weeks, two-thirds within 14 weeks and seven-eighths within six months.
  • Recent studies show that most workers replace their old job with a new one that pays as well or better.

Furthermore, Cox and Alm say the perception that average workers are not sharing in rising prosperity is wrong. For example:

  • From 1974 through 1993, per capita real personal income increased an average of 1.4 percent a year.
  • Real total compensation, which includes wages and benefits, rose about half a percentage point a year.

Wage rates aren't growing faster, in part, because the percentage of the total compensation received by employees as nonwage benefits -- such as health care, payments for time not worked and pensions -- has been increasing for more than 40 years. Employee benefits have grown from less than 19 percent of payroll in 1951 to nearly 42 percent today.

Workers take additional compensation in nonwage benefits rather than wage income because benefits are often untaxed or taxed at a substantially lower rate than wage income. Thus it is the tax system, rather than corporations' unwillingness to share profits, that is slowing wage growth, even with unemployment below 5 percent.

Source: W. Michael Cox and Richard Alm, "The Economy's Good News: The Upside of Downsizing," NCPA Policy Backgrounder No. 146, February 25, 1998, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.


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