Layoffs (Usually) Don’t Work and Why They Harm More Than Help

“Layoffs are mostly bad for companies, harmful for the economy, and devastating for employees.” -Newsweek (2010)

In December 2017, I (along with many of my colleagues) got laid off by the parent company that had acquired our smaller company in 2014.

I think what struck many of us was that this larger company was (and still is) very wealthy and extremely profitable (constantly emphasizing this point in their town hall meetings) and they repeatedly reassured us that our jobs would be safe and that we were now part of this much better, larger, wealthier, more powerful enterprise.

Thus, when they began implementing mass layoffs, and eventually laying off almost everyone in the company, it came as quite a shock.

Although I am very fortunate to have landed an incredible new role, at an amazing company nine months later, some of my former colleagues are still looking.

Having gone through this layoff experience, I want to share this article in hopes of bringing attention to the harmful effects of layoffs to not only the employees who are let go, but also the companies that implemented the layoffs.

Downsizing Defined

Downsizing is the planned elimination of jobs or positions (Cascio, 2016).

“Whether we call it ‘rightsizing,’ ‘downsizing,’ ‘layoffs,’ or ‘reductions in force,’ there’s no denying that U.S. corporations have been reducing the size of their workforces at alarming rates since the late 1980s” (Levy, 2017, p. 384).

The Consequences of Losing Your Job

This passage from Aamodt’s Industrial/Organizational textbook is a powerful reminder of the dramatic and devastating effect of losing one’s job:

“From a health perspective, victims of downsizing report increases in headaches, stomach upsets, sleeping problems, cholesterol levels, physical illness, hospitalization rates, heart trouble, hypertension, ulcers, vision problems, and shortness of breath. Emotionally, victims report high levels of stress, increased drug and alcohol abuse, more marital problems, and feelings of depression, unhappiness, anger, frustration, and dissatisfaction with life. Socially, victims are reluctant to share their feelings with friends, avoid family and friends due to feelings of embarrassment and shame, and avoid social situations and entertainment requiring money” (Aamodt, 2010, p. 540).

Coping with job loss or the danger of losing one’s job is a major source of stress (Riggio, 2013). Landy & Conte (2013) explained that because a worker may continue to have strong affective, continuance, or normative commitments to the organization, a job loss can be devastating. “[R]esearch has consistently found job loss to be among the 10 most stressful events in a person’s life” (Levy, 2017, p. 383).

Mental, Physical, & Psychological Costs of Job Loss

The effects of job loss include (Landy & Conte, 2013, citing Warr):

  • Poor psychological health
  • Depression, insomnia, irritability, lack of confidence, inability to concentrate, and general anxiety

The reasons for these effects on one’s psyche are (Landy & Conte, 2013, citing Warr):

  • loss of job reduces income and daily variety
  • loss of job suspends the typical goal setting guiding day-to-day activities
  • loss of job results in fewer decisions to be made because there’s little to decide about
  • decisions that are made tend to be trivial (when to get up, when to look for work, etc.)
  • because of loss of job, new skills are not developed and current skills begin to atrophy
  • as a result of loss of job, social relations are radically changed

Emotional and Financial Cost of Job Loss

In a New York Times article about the emotional and financial toll of being unemployed, Luo and Thee-Brenan (2009), shared a New York Times/CBS News poll of unemployed adults (708 unemployed adults between Dec. 5 to Dec. 10, 2009). Here’s what they found about unemployed Americans:

EMOTIONALLY

  • 69% are more stressed.
  • 55% have had trouble sleeping.
  • 48% have experienced emotional or mental health issues (e.g., anxiety or depression).
  • 46% have felt ashamed or embarrassed about being unemployed.

FINANCIALLY

  • 53% have borrowed money from family members or friends since losing their jobs.
  • 54% have reduced visits to doctor or medical treatments.
  • 47% is without health care coverage.

The Psychological Effects of Unemployment

“[U]nemployment is psychologically devastating based upon a loss of discretionary control. . . The act of choosing is severely restricted by unemployment. Attempting to solve problems with limited resources frequently means that the quality of the solution is poorer, which can engender a sense of failure and lowered self-esteem. Thus the loss of financial resources limits choices, thereby enhancing feelings of limited control over one’s life. In turn, lowered psychological health follows from this condition” (Muchinsky, 2006, p. 373).

Hidden Costs of Downsizing

Many organizations believe that cutting costs via downsizing/workforce reduction (eliminating or combining related or redundant positions in order to improve cost & efficiency) is a viable option.

“Corporate downsizing has become a conventional response by contemporary organizations that find themselves burdened with economic inefficiencies. For most organizations the single biggest expense is the salaries and benefits paid to their employees. By eliminating jobs, they reduce payroll costs. By eliminating many jobs (4,000 – 10,000 jobs in some very large companies), they can save vast sums of money. But then comes the problem of getting all the work accomplished by the people who remain. Consequences of restructuring the organization may include greater use of computerization or automation of work, less oversight by supervisory/managerial personnel, greater use of overtime among hourly paid workers, and longer workweeks among salaried employees. . . Although downsizing has forced organizations to operate with greater efficiency, some organizations are discovering they cannot reclaim the productive output they had achieved with a larger workforce. In short, the loss of jobs did not strengthen their economic position but instead weakened it.” (Muchinsky, 2006, p. 271).

“[D]ownsizing has negative impacts on employee morale and health, workgroup creativity and communication, and workforce quality” (Heneman & Judge, 2005, pp. 703-704).

Some hidden costs of downsizing include (Snell & Bohlander, 2013, p. 17):

  • Severance and rehiring costs
  • Accrued vacation and sick day payouts
  • Pension and benefit payouts
  • Potential lawsuits from aggrieved workers
  • The loss of institutional memory and trust in management
  • A lack of staffers when the economy rebounds
  • Survivors who are risk averse, paranoid, and focused on corporate politics

Costs of Layoffs to Companies

Layoffs are more costly than many organizations realize (Cascio & Boudreau, 2011). In tracking the performance of organizations that downsized versus those that did not downsize, Cascio (2009) discovered that, “As a group, the downsizers never outperform the nondownsizers. Companies that simply reduce headcounts, without making other changes, rarely achieve the long-term success they desire” (p. 1).

In fact, direct costs of laying off highly paid tech employees in Europe, Japan, and the U.S., were about $100,000 per layoff (Cascio, 2009, p. 12).

Companies lay off employees expecting that they would reap the economic benefits as a result of cutting costs (of not having to pay employee salaries & benefits). However, “many of the anticipated benefits of employment downsizing do not materialize” (Cascio, 2009, p. 2).

While it’s true that, with downsizing, companies have a smaller payroll, Cascio contends (2009) that downsized organizations might also lose business (from a reduced salesforce), develop fewer new products (because they are less research & development staff), and experienced reduced productivity (when high-performing employees leave due to lost of or low morale).

“[L]arge layoffs tend to result in a substantial decline in employee morale and commitment and a significant increase in stress. And for the bottom line, research indicates that companies with very deep layoffs underperform the market by as much as eight percent over the ensuing three years” (Cascio, 2009, p. 2).

When Downsizing is The Answer

Cascio notes that downsizing “can be an appropriate tool in some cases” (2009, p. 2) and that it makes sense when it’s “part of a broader workforce strategy designed to align closely with the overall strategy of the business” (2009, p. 2).

“For example, a new business strategy that pursues different products or services and new types of customers may motivate firms to lay off employees with obsolete skill sets and hire new employees with the skills to implement the revised business strategy. In this case and some others, downsizing does make sense” (Cascio, 2009, p. 2).

Alternatives to Downsizing

When senior leaders in the organization believe the downturn in business is permanent, instead of downsizing, Cascio (2009) suggests retraining employees to develop new lines of business. If the leaders believe the downturn in business is temporary, there are many options to cut costs (see the graphic, “Alternatives to Employment Downsizing for Temporary Downturns”). For example, popular cost-saving strategies include: Freezing or reducing hiring; Cutting travel and entertainment; Reducing pay or raises; Scaling back employee events; Conducting targeted layoffs, and so on (Cascio, 2009).

Takeaway: As professor Paul M. Muchinsky wrote (2006, p. 374), “Work provides a sense of meaning and purpose to life, and the removal of that purpose lowers the quality of life.” Downsizing is not a cost-cutting cure-all and it does not guarantee that short-term savings will surpass long-term costs. Downsizing is sometimes necessary, but it is important that organizational leaders understand and consider the short- and long-term costs, as well as the many alternatives to downsizing that are available (Cascio, 2009).

Written By: Steve Nguyen, Ph.D.
Leadership + Talent Development Advisor

References

Aamodt, M. G. (2010). Industrial/organizational psychology: An applied approach (6th ed.). Belmont, CA: Wadsworth.

Cascio, W. F. (2009). Employment Downsizing and Its Alternatives: Strategies for Long-Term Success. Alexandria, VA: SHRM Foundation.

Cascio, W. F. (2016). Managing Human Resources: Productivity, quality of Work Life, Profits (10th ed.). New York: McGraw-Hill Education.

Cascio, W. F., & Boudreau, J. (2011). Investing in People: Financial Impact of Human Resource Initiatives (2nd ed.). Upper Saddle River, NJ: Pearson.

Heneman, H. G., III, & Judge, T. A. (2005). Staffing organizations (5th ed.). New York: McGraw-Hill/Irwin.

Landy, F. J. & Conte, J. M. (2013). Work in the 21st century: An introduction to industrial and organizational psychology (4th ed.). Hoboken, NJ: Wiley.

Levy, P. E. (2017). Industrial/organizational psychology: Understanding the workplace (5th ed.). New York, NY: Worth Publishers.

Luo, M. & Thee-Brenan, M. (2009, December 14). Poll reveals trauma of joblessness in U.S. Retrieved from http://www.nytimes.com/2009/12/15/us/15poll.html

Muchinsky, P. M. (2006). Psychology applied to work (8th ed.). Belmont, CA: Thomson Wadsworth.

Newsweek. (2010, February 4). The Case Against Layoffs: They Often Backfire. http://www.newsweek.com/case-against-layoffs-they-often-backfire-75039

Riggio, R. E. (2013). Introduction to industrial/organizational psychology (6th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

Snell, S., & Bohlander, G. (2013). Managing Human Resources (16th ed.). Mason, OH: South-Western, Cengage Learning.