NCPA - National Center for Policy Analysis

The Hazards Of Layoffs

February 21, 2001

Companies trying to cut costs by laying off employees may be employing a self-defeating strategy, economists and management consultants warn. They caution that downsizing often hurts companies more than it helps.

Several studies which evaluated the performance of companies after they laid off employees during the 1990 recession support this theory:

  • A study by Watson Wyatt Worldwide found that fewer than half the companies it surveyed after that recession met profit goals after laying off employees.
  • Mercer Management Consulting found that 68 percent of the "cost cutters" it studied didn't achieve profit growth for five years.
  • Bain & Co. found that companies which announced mass layoffs or repeated layoffs underperformed the market over a three-year period.
  • Now working on a book about downsizing, Princeton University professor Alan Blinder, a former vice chairman of the Federal Reserve Board, says the evidence that downsizing boosts productivity "is very weak."

Some researchers have found that layoffs sometimes even hurt productivity by leaving surviving employees overburdened and demoralized. The same amount of work may be spread over fewer employees, leaving them discouraged. Layoffs also leave those remaining to wonder "who's next?"

Even benevolent layoff approaches -- such as relying on attrition, for example -- can backfire on managers. Those who leave may not actually be the ones they wanted to leave.

Nevertheless, layoff strategies have their proponents. In a January survey of senior executives by Bain & Co., nearly two in five said layoffs were their first line of attack during a downturn.

Source: Jon E. Hilsenrath, "Many Say Layoffs Hurt Companies More than They Help," Wall Street Journal, February 21, 2001.

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