According to a 20-year study of 20 Organization for Economic Cooperation and Development economies, labor-productivity growth was higher in economies that adopt formal prohibitions against dismissal of employees as opposed to those that lay off employees left and right. The research reached a consistent conclusion that shows that layoffs are in fact ineffective.
Wayne Cascio, a professor at University of Colorado professor lists the direct and indirect costs of layoffs in his book - Responsible Restructuring:
• severance pay
• paying out accrued vacation and sick pay
• outplacement costs
• higher unemployment-insurance taxes
• the cost of rehiring employees when business improves
• low morale and risk-averse survivors
• potential lawsuits
• workplace violence from aggrieved employees or former employees
• loss of institutional memory and knowledge
• diminished trust in management
• reduced productivity
Some Myths about downsizing
• Increases stock prices than peers (announcement of downsizing) — either immediately or over time
• Increases individual company productivity
• Increases profits
• Cutting off people is similar to amputation where you cut a part to save a whole (it does not save the organization, it just delays its demise)
Some Effects of downsizing
• People cut back on spending - since people who lost their jobs lose income, they would end up spending less. Workers who kept their jobs, would be more cautious in their spending habits our of fear that they might lose their jobs too. This in turn would affect the economy, since when sales drop, companies would need to fire more people, continuing the vicious cycle.
• Health of people suffers - since people lose their health insurance along with their jobs, it leads to people skipping diagnostic tests (e.g. mammograms and colonoscopies) that could prevent more serious problems. Studies show that there is a direct relationship between not having health insurance and individual mortality rates.
• Depression - losing their jobs could lead people to depression, leading to anxiety and other psychological problems and even violent tendencies on those the feel responsible for their lay off.
• Suicide - suicide rates increase as much as 2.5 times according to a study in New Zealand among people aged 25-64 who had been layed off.
• Substance abuse - downsizees are more inclined to depend on alcohol, smoking, drug abuse, and are prone to depression.
So for whatever reason, companies should always think carefully before they consider downsizing and weigh the pros and cons, and more importantly the consequences of their actions not only for the organization but for the country’s economy as well. I still remember what Mr. Rich (Richie Rich’s dad) said in the movie Richie Rich that one of his policies is to never fire an employee and that he has never fired an employee in his whole life (except when he had to fire the villain who kidnapped him at the end of the movie) and I was surprised that there is at least one company that shares the same belief currently the largest domestic U.S. airline and has a bigger market capitalization within the industry, Southwest Airlines has never had an involuntary layoff in nearly 40 years of its existence. As its former head of human resources once said: