Will Downsizing Ever Let Up?

The pros and cons of rising layoffs

Until recently, it looked as if the huge wave of downsizing that roiled U.S. labor markets in the 1990s was finally receding. Last July, for example, outplacement firm Challenger, Gray & Christmas Inc., which tracks corporate-layoff plans, noted that planned job cuts were running 30% below 1996 levels. And the latest American Management Assn. survey of major companies reveals that just 41% eliminated jobs in the 12 months ending last June--the lowest tally of the expansion.

Now, in spite of tight labor markets, it appears that the pace of downsizing is on the upswing again. Challenger reports that job-cut announcements in the fourth quarter of last year, at 152,854, were up 33% over their year-earlier level (chart), and the just-released January, 1998, total of 72,193 was the highest monthly number in two years.

While eliminating jobs reduces operating expenses for most companies over the short run, its payoff in other areas is far from certain. Only 41% and 46% of job-cutters in the AMA's annual surveys can report increases in worker productivity and operating profits in subsequent years. And just 37% realized long-term gains in shareholder value.

One positive aspect of the downsizing trend, at least until recently, is that it has been increasingly offset by job creation. Of the 41% of companies reporting job cuts in its latest survey, the AMA notes that over a third hired enough people in other capacities to realize net growth in their workforces. Indeed, only 19% of companies overall wound up with reduced payrolls, and a solid 54% posted net increases.

The big question now, however, is whether the pattern of subsiding job cuts and offsetting job creation is swinging into reverse--particularly in light of the economic slowdown that many forecasters see ahead. John A. Challenger of Challenger, Gray & Christmas attributes the latest pickup in layoff announcements to a developing profit squeeze, exacerbated by Asian turmoil and heightened competition on the one hand and rising labor costs on the other.

"Companies under pressure are quicker than ever to shed workers," he says, noting that most laid-off employees are less traumatized by the experience today because they can find jobs more easily, thanks to widespread labor shortages. But he wonders whether many reenergized job-cutters may not come to regret their actions in the future.

"Such short-term cost-cutting strategies," he warns, "could backfire over the long term when expanding global and domestic markets challenge productive capabilities again."