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Companies that provide employment security through economic downturns invest in their human capital. While widespread downsizing became common in the 1980s-90s, some companies avoided layoffs, recognizing the advantages of workforce stability. Retaining employees helps companies adapt to changing technologies and market conditions by maintaining experienced, committed employees. Studies show layoffs are inefficient in 30-50% of cases and companies lose more skilled employees due to uncertainty after downsizings. The costs of layoffs go beyond severance pay and include disruption of operations from seniority-based bumping of employees into new roles for which they may not be qualified. Both tangible and intangible costs like lower morale among remaining employees can persist after downsizings.
Companies that provide employment security through economic downturns invest in their human capital. While widespread downsizing became common in the 1980s-90s, some companies avoided layoffs, recognizing the advantages of workforce stability. Retaining employees helps companies adapt to changing technologies and market conditions by maintaining experienced, committed employees. Studies show layoffs are inefficient in 30-50% of cases and companies lose more skilled employees due to uncertainty after downsizings. The costs of layoffs go beyond severance pay and include disruption of operations from seniority-based bumping of employees into new roles for which they may not be qualified. Both tangible and intangible costs like lower morale among remaining employees can persist after downsizings.
Companies that provide employment security through economic downturns invest in their human capital. While widespread downsizing became common in the 1980s-90s, some companies avoided layoffs, recognizing the advantages of workforce stability. Retaining employees helps companies adapt to changing technologies and market conditions by maintaining experienced, committed employees. Studies show layoffs are inefficient in 30-50% of cases and companies lose more skilled employees due to uncertainty after downsizings. The costs of layoffs go beyond severance pay and include disruption of operations from seniority-based bumping of employees into new roles for which they may not be qualified. Both tangible and intangible costs like lower morale among remaining employees can persist after downsizings.
Companies also invest in their human resources when they keep
employees on the payroll through business downturns. Nonetheless, by the 1980s and 1990s, it became clear that employment security policies were often untenable, and downsizing became a daily feature of the business press. However, companies differed in the extent to which they resorted to downsizing or layoffs as many of the best ones did little or no downsizing. Although some companies provide employment security to enhance their chances of remaining union free, others provide such security for other workforce advantages. Increasingly, companies find that they must operate in environments characterized by rapidly evolving technological change, compressed product life cycles, and heavy emphasis on quality. In many such environments, greater employment security helps companies obtain the commitment, flexibility, and motivation needed from their workforces.65 Indeed, three of Fortune’s 100 best companies to work for have official no- layoff policies—Southwest Airlines, Harley-Davidson, and FedEx—and another, Hewlett-Packard, has been a leader in workforce security for decades.
Recognition of the Costs of Downsizing and Layoffs Although there are
many associated costs, downsizing is a fact of life in the United States, and layoffs occur with downturns in the business cycle. A strong labor market eliminated most cycli-cal layoffs in the late 1980s and 1990s, but frequent downsizing has continued into the twenty-first century. Downsizing is commonly linked to competitively driven structural changes in organizations, although it also is triggered solely by attempts to cut costs. Nonetheless, the costs of downsizing and layoffs are becoming better understood.67 For example, a study of approximately 100 surplus workforce situations revealed that it would have been more cost effective not to have laid off workers in 30 percent of the situations and to have laid off fewer workers in 20 percent.68 Layoffs have been criticized on the grounds that they are sometimes inefficient, relative to other cost-reduction strategies. A major inefficiency or cost associated with downsizing or layoffs is that a firm’s layoff practices may make it less attractive as a potential employer. A typical result of downsizing is that another 10 to 15 percent of an organization’s workforce will often quit after layoffs. The uncertainty of future employment often causes some of the better, more mobile employees to leave. These, of course, are the employees that the acquiring organization would like to keep.69 Numerous other costs are involved in layoffs. One of the major costs is incurred in bumping practices. Because layoffs are typically conducted by inverse seniority, invariably where there is a union contract, employees with less seniority are “bumped” out of their jobs by more senior employees whose jobs have been targeted for elimination because of a lack of work. A chain reaction then occurs as more senior employees bump those with less seniority until, as in a game of musical chairs, the least senior is left without a job.70 The width of the seniority unit that will govern bumping rights determines the impact of bumping. Narrower seniority units or definitions prevent a senior employee from displacing a junior employee in a job in which he or she is not qualified. With broader seniority units or definitions, senior employees can bump into new jobs for which they lack skills. As a result, training is needed for them to reach the proficiency levels of the junior employees who were bumped. Unions generally argue for broader seniority units on the basis of fairness while employers seek narrower definitions in order to minimize the dysfunctional aspects of bumping.71 In addition to bumping costs, there are also severance, administrative, and intangible costs. Intangible costs sometimes involve declines in morale of the remaining workforce and disruption of work group synergy.72