Layoffs and Downsizing

Layoffs and downsizing refer to the intentional reduction of a company's workforce, often as a strategy to improve organizational efficiency and effectiveness. Each year, over a million American workers across various sectors experience mass layoffs, which can occur during economic downturns or in stable economies as a means for companies to restructure and operate more "leanly." Companies may decide to downsize to eliminate unprofitable divisions or to outsource certain functions, aiming to cut costs and enhance profitability.

The impact of layoffs extends beyond those who lose their jobs; remaining employees often face uncertainty and diminished morale, which can affect their productivity and commitment to the organization. While some argue that downsizing can lead to efficiency gains, the long-term effects on organizational performance are debated. Factors such as organizational slack—reserves of resources—play a crucial role in determining a company's ability to adapt to changing conditions post-layoff. Moreover, the decision to downsize is influenced by a mix of rational analysis and emotional responses, reflecting broader economic realities and the personal dimensions of job security.

Published in: 2023

By: Duffy, Francis

Subject Terms

Layoffs and Downsizing

Over a million American workers, both blue and white collar, lose their jobs each year in mass layoffs. Companies have traditionally resorted to layoffs during economic slowdowns; however, this is now also occurring in good economies for purely strategic reasons. By shedding faltering product lines, moving costly operations overseas, and outsourcing burdensome administrative functions, businesses hope to transform themselves into "lean " operations. The reality is often different.

Keywords Arational Organization Theory; Downsizing; Instrumental Network; Mass Layoff; Organizational Efficiency; Organizational Effectiveness; Organizational Slack; Outsourcing; Rational Organization Theory; Restructuring

Work & the Economy > Layoffs & Downsizing

Overview

Nothing probably causes as much anxiety as rumors of impending layoffs. To quit a job is one thing: you choose to leave for personal reasons. To be laid off is quite another: your employer simply declares you redundant and hands you a pink slip. The reason may be a souring economy, a reversal of the company's fortunes in the marketplace, a merger, or a change in corporate strategy. Whatever it is, in the final analysis, a company's performance as a business is more important than an individual worker's performance.

Regardless of how well run a business is managed, revenues may decrease as the economy stalls. Bottom-line considerations dictate that production be scaled down at such times, which is the cause of many layoffs. A mass layoff involves a large number of job losses over a relatively small period of time. Sometimes, as often happens in declining industries, the company has little choice: it must shrink, diversify, or go under. At other times, the distress is self-inflicted: a company lacks market focus, adequate cash flow, competent leadership, or other elements crucial to success.

Companies are now inclined to ensure profitability by moving operations to foreign countries to minimize production costs. This is followed by a downsizing or a form of organizational restructuring. Parts of the business that are cost centers rather than profit centers are eliminated, and their work may be outsourced to third parties.

The Bureau of Labor Statistics (BLS) identifies a mass layoff whenever 50 or more employees of the same business file an unemployment insurance claim over five consecutive weeks. If these ex-employees remain out of work for a minimum of 30 consecutive days, the BLS further classifies said terminations as extended mass layoffs. In 2023, high inflations and interest rates, as well as the expectation of an impending recession, compelled many businesses to reduce their workforces. While layoffs may typically be associated with blue-collared or manufacturing jobs, in 2023, these job reductions impacted many notable technology and service businesses. According to Forbes Magazine, the first three months of 2023 saw 136,000 eliminated from their jobs. These included stalwart companies such as Amazon, Google, and Microsoft.

As an organizational strategy, downsizing is very different from the long-standing practice of temporarily laying workers off during economic hard times. It is also pursued for different reasons. Downsizing and the associated practice of outsourcing are increasingly being done not to ensure corporate survival, but to create a "lean" company.

Though loosely used as a synonym for mass layoff, downsizing is really much more of a corporate makeover, with the subsequent culling of employees as its by-product. Technically speaking, one can lay off employees and not downsize, but one cannot downsize without permanently laying off employees.

Further Insights

During the early 1990s, an extended period of mass layoffs subjected workers to an average of 17.94 weeks of unemployment. Incidences of extended layoffs reported among educated and white-collar workers were higher than in previous decades. But the hardest-hit demographic remained blue-collar workers with a high school education or less who worked in the manufacturing sector (Kletzer, 1998).

Researchers surveying the non-agricultural sector found that ninety-seven percent of the 78,115,000 employable Americans in their sample had jobs. 1,192,000, or 2%, of these workers, were displaced, meaning they had lost their jobs due to a recent plant closing and had not found alternative employment for three or more months. Another 766,000 were laid off for a shorter period of time, and an additional 652,000 left their jobs voluntarily (Kletzer, 1998).

Women made up 46.4% of the workforce but only 33.7% of extended and 18.8% of all temporary layoffs. African Americans and Hispanics did not fare as well. The proportion of African Americans in the workforce at the time, 9.9%, mirrored their representation in the pool of temporary layoffs (9.8%) but paled in comparison to their proportional representation in the extended layoff pool, which was 17.2%. Hispanics made up another 7.6% of the labor pool sampled but accounted for 8.9% of temporary and 13.1% of extended layoffs (Kletzer, 1998).

Surprisingly, a college degree no longer offered the same job security as previous. Fourteen and a half percent of displaced workers were university graduates, compared to 21.3% of total workers. By comparison, just 4.5% of those laid off for a shorter spell had a bachelor's degree. As might be expected, though, workers with only a high school diploma or less had much dimmer prospects, making up 50.1% of the workforce but accounting for 80.4% of short-term and 64.7% of long-term layoffs. Workers with even a few college credits had much less of a problem: at 28.2% of the labor force, they suffered 15.3% of all temporary and 20.7% of all extended layoffs (Kletzer, 1998).

Socioeconomic status, moreover, was no longer as strong a guarantee of steady employment as it once had been. White-collar workers were far more likely to be displaced than they were to be simply laid off: 15.6% of all displaced workers had held managerial or professional positions, compared to just 3.2% of laid-off employees. Other office workers were almost as vulnerable: 15.2% of displaced and 4.1% of laid-off workers had held administrative support positions. Still, composing 26.5% of displacements and 49.2% of layoffs, laborers bore most of the brunt, followed closely by semiskilled production workers at 22.5% and 32.1% respectively (Kletzer, 1998).

Slightly more displaced workers, 19%, had had jobs with retailers than with durable goods manufacturers (18.5%) or construction firms (15.4%). Meanwhile, 14.2% had worked for financial-services firms and 12.5% for nondurable-goods manufacturers. The mining industry had the fewest displaced workers: a bare 1.1%. A whopping 41.6% of temporary layoffs, on the other hand, came from the construction industry; durable-goods manufacturers ran a distant second with 22.6% (Kletzer, 1998).

In 2023, high inflations and interest rates, as well as the expectation of an impending recession, compelled many businesses to reduce their workforces. While layoffs may typically be associated with blue-collared or manufacturing jobs, in 2023, these job reductions impacted many notable technology and service businesses. According to Forbes Magazine, the first three months of 2023 saw 136,000 eliminated from their jobs. These included stalwart companies such as Amazon, Google, and Microsoft.

Impact on Remaining Employees

Being laid off is certainly a traumatic experience for those forced to leave a company. Employees who may have managed to retain their employment will also go through a period of uncertainty and sometimes painful readjustment. Layoffs demoralize the remaining employees. They can feel guilt over friends' suffering, loss at their absence, and lingering doubts about the fairness of the company's treatment. Remaining workers, consequently, can feel isolated, dissatisfied with their jobs or employers, and less confident about and committed to the organization's future.

Their performance may suffer, too, from the consequent disruption of the organization's internal social network in general and in particular its "instrumental network," or the informal channels of communication through which workers exchange information, resources, expertise, advice, and political access. This network is so important that in the immediate aftermath of a mass layoff, the remaining employees devote much of their time and energy toward reconstituting it. As gaps are filled in, some employees find that their centrality and power has increased, while others find that their importance and influence has decreased.

Employees also spend time assessing their own near-term prospects, given the dismissal of so many people occupying similar positions in the organization. Pessimists may see the organization's treatment of these employees, or structurally equivalent referents, as a sign of their own impending layoffs and begin considering opportunities elsewhere. Optimists, on the other hand, may view the slimmed-down field of competitors and see opportunities for their own advancement (Shah, 2000).

Impact on Organizations

Whether layoffs and downsizings live up to organizations' expectations has been debated for decades. Some studies have shown that there is little if any long-term net effect in regard to efficiency or effectiveness, while other studies show declines and still others improvements (Love & Nohria, 2005). Companies benefit from them by saving money in the short term, but for those companies struggling with declining demand, layoffs and downsizings are only a temporary solution. Additionally, businesses may find that cuts in personnel may also inadvertently cut into their ability to deliver added value to customers, meet unforeseen challenges, and develop innovative new processes and products. The retained workforce's skills and knowledge may simply not be up to the task, or the true value of a laid-off employee's expertise and work experience may not be realized until months or years after the layoff. The employees who remain, moreover, may find themselves overworked or more risk averse vis-à-vis their job performance and decision making. Similarly, they may become more outwardly political in their interactions with coworkers (Love & Nohria, 2005).

A mitigating factor may be a company's organizational slack, or the internal resources above and beyond the minimum necessary for the company to function. However, a company may find that having some "available slack" — reserves of personnel, capital, etc. — serves it well, since this slack can be readily deployed to counter some new external threat. "Absorbed slack," on the other hand, cannot. As the end-result of custom, organizational inertia, and bureaucratic empire building, absorbed slack is simply too entrenched in the organization's often-inefficient daily work routines and administrative processes to be easily retrieved, much less redirected.

The trick to successful downsizing lies in peeling away this fat of absorbed slack while preserving the muscle of available slack, something easier said than done. As long as these nonproductive routines and processes are countenanced by the organization, someone will do them; workforce reductions alone do not address the problem. It takes a thorough overhaul of the organization's structure and business processes to weed out absorbed slack.

Information Technology's Role in Organizational Restructuring

Information technology (IT) is proving to be a factor in the reduction of downsizing. IT streamlines processes and procedures, wringing any absorbed slack out of them. IT allows each and every step of a business process or work routine slated for computerization to be examined and, when necessary, revamped for the sake of greater efficiency. Critically, though, IT also puts additional, hitherto unrealizable available slack at an organization's disposal.

These two benefits combined execute routine tasks more quickly and repetitive ones more accurately than any employee could. Employees are freed to give greater attention to mission-critical matters, and organizations are freed to redistribute their workforces toward more productive ends or reduce them outright and cut costs. Spans of control naturally expand when information flows directly between concerned parties in real time instead of slowly making its way up multiple layers of now-extraneous middle management (Pinsonneault & Kraemer, 2002).

The Decision to Downsize

The decision to downsize is a premeditated one premised on either rational or irrational organizational theory. Proponents of the former consider organizational efficiency paramount. The survival, and ultimately the success, of an organization depends on how well that organization internally coordinates and controls its response to changing competitive conditions, be they economic or technological. Doing so allows the organization to drive down costs (and thus prices) to become lower than those of its rivals, a strategy many industrial firms unflinchingly pursue. A very different tack is taken by proponents of the latter. They see an organization principally as a social institution whose survival is dependent upon the cooperation and goodwill of stakeholders, regulatory agencies, industry fellow travelers, and the public at large (Budros, 2000).

An organization presumably downsizes to improve its efficiency. This often happens in response to shareholder dissatisfaction with financial returns, something that is a rational concern for this key constituency. At the same time, however, the decision is also influenced by irrational organizational behavior. Other institutional constituencies, most notably those in charge of actual operations, can object on equally rational grounds, arguing that the called-for cuts or restructuring will only introduce greater inefficiency in the long run.

In the decades since its introduction, the downsizing paradigm has collected a legion of followers. Some of its popularity may be attributable to what scholars call normative and mimetic normative isomorphism. This is where companies adopt the practices of other businesses either to conform to a professional standard or to reduce uncertainty about their own practices. It may, nonetheless, be true that downsizing can indeed enhance efficiency. Executives should bear in mind that the benefits of downsizing are still debated and probably at least partially contingent upon the company's unique circumstances (McKinley, Zhao, & Rust, 2000).

Viewpoints

Given the choice, very few workers would want to be laid off or downsized. Considering the rather public admission of failure layoffs and downsizing imply, few organizations want to engage in the practices either. Economies, nonetheless, expand and contract, and superior new production technologies are introduced as popular product lines fall out of favor. The insistence on greater shareholder value will eventually grow too hard to ignore. Businesses will also fail because they are poorly run, and whole industries may become obsolete and just wither away.

Layoffs, therefore, have and will always occur in self-correcting, free-market economies, prodding workers and companies to be ever more productive. This is not to say that alternatives have not been sought, just that they have been seen to come at too high a price. A guaranteed job for life was the cornerstone of the communist system, but the command economy that artificially propped up full employment proved to be grossly inefficient and its productive output paltry in comparison to capitalist economies. Everyone had a job to go to, but there were no goods to buy.

The underlying idea that a social contract exists between employees and employers did not disappear with these command economies. The idea that people voluntarily enter reciprocal arrangements to further their collective interests was a part of the Western tradition long before communism came along. Applied initially by Hobbes and Locke to the political domain and subsequently by Rousseau to the social in the 18th century, it has since migrated into the economic realm. We see its influence today in such things as unemployment benefits, government-sponsored job-retraining programs, welfare capitalism, etc. This is not to say the arguments have been settled; far from it. Individualists believe that individuals, not a company or the state, are responsible for their life choices, of which their jobs are one. Individuals, they believe, are thus responsible for the outcomes of these choices. We would only end up sacrificing our personal freedoms if we were to abrogate this responsibility. Communitarians, on the other hand, believe that we are born into and subsequently shaped by society. Its institutions, therefore, have a vested interest in providing us with sustenance, if not an outright moral obligation to do so.

Having a secure job may well incline one to favor the individualist view. Understandably, though, the very prospect of being laid off might well cause one to reconsider the communitarian view. And therein lies an often-overlooked fact: beyond economic rationales and the dynamics of organizational decision making, there is an acutely personal dimension to layoffs and downsizing.

Terms & Concepts

Rational Organization Theory: Emphasizes the primacy of organizational effectiveness in meeting internal or external needs; considered to be a social-political institution with formal and informal obligations to a set of diverse constituents.

Downsizing: "The planned elimination of positions or jobs designed to improve organizational efficiency and effectiveness" (Pinsonneault & Kraemer, 2002).

Instrumental Network: Informal channels of communication within an organization through which information, resources, expertise, advice, and political access are exchanged.

Mass Layoff: A US Bureau of Labor Statistics classification assigned whenever fifty or more of a company's employees file an unemployment insurance claim over a period of five weeks and collect benefits for a period of at least 30 consecutive days.

Organizational Effectiveness: The extent to which, through its actions, an organization creates socially acceptable outcomes. The loyalty of employees and stakeholders and the approval of regulators and the general public can all factor into organizational effectiveness.

Organizational Efficiency: A set of primarily technico-economic criteria that evaluates how well an organization eliminates waste and redundancies and how fast and cost-effectively it produces goods or provides services.

Organizational Slack: Personnel, capital, and other organizational resources in excess of the operational requirements held in reserve to meet unexpected challenges. When these resources can be easily marshaled and redeployed, this slack is "available" and an asset. When they are structurally too embedded to be readily retrieved and redirected, this slack is "absorbed" and considered a liability.

Outsourcing: The transfer of tasks and functions formerly done within a company by full-time employees to a different company, often located in another country. This is done to reduce overhead or refocus on core competencies.

Rational Organization Theory: The view that organizational efficiency ultimately determines success or failure. The theory holds that success is more likely if the structures and strategies adopted to meet changing environmental conditions do not adversely affect control and coordination within the organization.

Restructuring: The reorganization of operational procedure and processes; the consolidation of operating units; or the reduction of a firm's bureaucracy, hierarchical management structure, or scope of overall operations.

Bibliography

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Layoffs and Downsizing

On this Page

Subject Terms

Layoffs and Downsizing

Work & the Economy > Layoffs & Downsizing

Overview

Further Insights

Impact on Remaining Employees

Impact on Organizations

Information Technology's Role in Organizational Restructuring

The Decision to Downsize

Viewpoints

Terms & Concepts

Bibliography

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