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If layoffs are so bad for business, why are they so common?

Apparently the evidence is hiding in plain sight: both scholarly studies and industry research are reaching the same conclusion, that layoffs are bad for business, bad for employees, bad for the economy, and bad pretty much all around. The examples cited in the Newsweek article are appalling and leave me scratching my head. Professor Pfeffer proposes that “follow the crowd” behavior is at the root of much of the recent rash of downsizing, managerial behavior “spreading like the flu across companies.”

There is no denying that some industries are in transition, and in them, staffing realignments are a recognition of the new reality. However, when organizations get into a cycle of layoffs during downturns and rehires as soon as the economy picks up, it’s hard to escape the conclusion that the layoffs may not have been required to keep the enterprise alive, but were rather an exercise of keeping up profits in the short term. The real question is, was the pain of the layoffs also short term, and the answer seems to be no.

If all of the research cited can be believed, the findings and Pfeffer’s conclusion do not reflect well on corporate leadership, particularly if, as I strongly suspect, much of the evidence of the deleterious effects of layoffs is right in our BI systems, should anyone care to look for it.

It just cannot be all that difficult to prove, for example, that announcing a layoff does not necessarily raise the company share price, either immediately or in the longer view. If companies that experience increases in productivity are as likely to have added staff as to have reduced staff, that, too, ought to be supported by the evidence in our records of sales and staffing trends. Pffeffer claims that layoffs don’t even reliably reduce costs, and that ought to be the easiest claim of all for management to confirm whether or not it held true in a particular organization.

Is it that no one wants to be the one to tell the emperor/ empress that s/he has no clothes? Now that I can believe, but that is one reason why you bring in outside consultants, to deliver the news that no one internally will deliver, unless they, too, are so invested in telling management what they want to hear that everyone, within and without, is a huge Greek chorus of yes men and women.  If so, it’s a sad state of affairs indeed, but let’s not kid ourselves: if executive leadership want the truth, one way or the other, I am convinced that we in IT could provide it to them. 

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  • I agree that layoffs can have both short and long-term detrimental effects to a company in terms of total overall profitability, but they can also have tremendous upside as well.  I believe the bigger problem is the wrong people being let go.  I’m sure we’ve all worked in environments where reducing 25% of the employees would have had no discernible impact on productivity, but that it would have to be the “right” 25%.  Is the issue, perhaps, that the people making layoff decisions can’t accurately tell which resources are or are not reducable?
    • Jamie,
      Yes, I too suspect as much, to an extent. When people who are known to be “dead wood” are the ones let go, it seems to me that you are not going to have the morale problems that you have when people who really were valuable contributors are let go. But either way, the end result is people out of work, cutting their spending, which in large enough numbers will take its toll on the local economy, which has its own trickle down effect.

      Thanks for your comments!

      • This is usually needed because HR policies don’t weed out dead wood periodically. And then one day they reach the “25% should go” state – and then there is no guarantee that they won’t throw good with bad people.
    • and these jobs usually dont just disappear..some one elsewhere is getting a better life. It is a zero sum game for employees if you take a global perspective. Unfortunately, it is not easy to have that perspective when you lose your job 🙁
      • Vijay,
        Someone somewhere else may be getting a better life, but quite often, the poor sods left in the reduced staffing office are now spending much of the day dealing with newly minted overseas personnel not familiar with the business processes, and any productivity gains from the lower cost of labor are eaten up in delays and rework. In any case, this is the kind of thing that we ought to be able to prove or disprove with our data.


        • true – there is a loss of productivity in short term while the new person ramps up. But that is true even if the new person is in local office. And in theory, such ramp stops at some point, and business gets the cost savings. Now, proving that using good data and analysis is the right thing to do – but with short term profits driving every action that a public company makes, who does analysis other than an academic who usually does not have complete data to work with?
    • Greg,
      But that is just it: layoffs are not good for those who stay either. As Professor Pfeffer cites in his article, managers often underestimate the morale problems caused by layoffs, and even the survivors tend to cut back their spending (worried that hey, I might be next), which can slow down the economy even more, causing a vicious downward spiral.


  • Hi Gretchen,
    I’ve never understood why companies in trouble let go the brains that can devise ways out of the trouble and the muscle that can execute such a plan. How do they expect to get out of a crisis if they cut off the knowledge the company has built up at significant costs?
    This is probably not true for every industry to the same extent, but in many industries, the key assets companies possess exist in their employees: knowledge about customers, markets, and demands, the company’s products and technologies, their business network and personal professional reputation, and motivation. Also, consider the value of each employee’s network inside the organization and the “standing” of each employee, which may be discribed of the collective ability of employees to correctly estimate and weigh each other’s competence and authority. Both being known and knowing others inside your organization is a valuable asset that builds only over time.
    These things are when you let go your employees, and it’s immensely expensive to rebuild. I believe that the cost of fully replacing an employee (considering all the aforementioned things) is in most cases much higher than any savings due to temporarily not paying for that employee. Just my amateurish 2 cents.
    • Thorsten,
      I completely agree, I just do not understand how organizations can expect to survive in the long run when so much of the institutional knowlege is walking out the door, whether voluntarily or involuntarily.
  • The previous comments have already elaborated on these points but in my experience and based on observations across many industry sectors layoffs in economic downturns are spurred on by some of the following common denominators:
    weak management – intellectually or technically threatened by the targeted candidates or who feel powerless to clear the brush of frustrating or poor performing staff they may have hired or have inherited and who they can’t find a good reason to dispense with in better times.
    Inferior HCM – inexperienced HCM personnel who don’t fully understand the task with which they are charged, don’t question manager recommendations and simply accept the manager’s recommendations and then do the legal hoop jumping to make sure that no particular age group, gender or tenured group are being targeted.
    Ambitious consultants – engaged to helpo in containing costs, who recommend RIF’s and layoffs in response to pressure to provide quick rationalisation performance numbers
    Naive employees – especially those who consider their jobs secure, and that the notion of a productive job and living income means continued employer-employee ’employment’

    In business’ where processes are well defined and procedurally clear, management should be the first to be dispatched, this would stimulate enthusiasm in the ranks and natural leaders would reveal themselves. People want their work to be directed, it simply doesn’t need to be tenured or expensive managers who need to be doing the guiding.

    • Vitaliy,
      Thanks for the link; it certainly was a completely different viewpoint. Mr. Evans made an interesting case with his apologia, but all the same, the professor’s case made in Newsweek is more convincing to me. I will go out on a limb a bit and say that it’s a pretty safe guess that my experiences with layoffs are somewhat  different from those of Mr. Evans, which may color our respective views.


      • By no means Evan’s point of view is mine 🙂 All I wanted is just to present his article to SDN forum as an interesting alternative especially that it was published about the same time as an article in BusinessWeek.
    • It is an interesting article but the comments are even more interesting. At the end of the day, the personal experience is of course what really matters and any single individual will have a completely different perspective on the fairness/unfairness of the layoff(s) depending on how it impacted them directly. A great dialog nonetheless. Thanks for posting this one too!
      • Clifton,

        I agree completely, that personal experiences with layoffs are very likely to color one’s view. This is why I was so interested in the scholarly and industry studies cited in the Newsweek article. Those researchers reached the same conclusion that many of us intuitively suspected but had no evidence to support. Mr. Evans is certainly entitled to his opinion, but I had to take it as his perspective on one company.

        I, too, have enjoyed all the comments very much. Thank you all for reading and taking the time to participate in the discussion! I still hope to hear from one of our BI data mining experts telling us how s/he proved or disproved some of these conclusions.


  • I work for a local wholly owned subsidiary of a major international outsourcer / consultancy / etc.  Without getting too specific, my company has had several sets of layoffs over the past five years. 

    However, this year the group I belong to was specifically targeted, not with a percentage, but by attribute.  In other words, people who would not travel (either interstate or locally), people who were not interested in retraining, people who failed to meet some other fairly specific criteria, were candidates for layoff.

    Following the layoffs, we were told “Last time, we let too many people go, and when the market returned, we couldn’t go after the new business because we didn’t have enough people”.

    Those that have been retained are not fully employed, but we are encouraged that management are not looking at the business (i.e. our Customers) on a quarter by quarter basis, but they do in fact have a long term view for the SAP group as a whole. 

    Its a nice change from even 2 or 3 years ago, where the accountants worked out a percentage and the work force was cut by that number, irregardless.