Hire Math: Fire 3, Add 5

Why job churning is on the rise

In May of last year, in response to a question after giving a speech in Chicago, Federal Reserve Chairman Alan Greenspan suggested that employers' continuing strong tendency to lay off workers may actually be promoting job creation. Whereas companies once viewed hiring new workers as a heavy commitment, the knowledge that they can also let workers go if conditions warrant may have made them less reluctant to boost payrolls.

The American Management Assn.'s latest annual survey of nearly 1,200 major companies doesn't address this notion directly, but its findings tend to support it. While the ranks of companies eliminating positions, as well as those of companies adding new ones, rose last year (chart), the share of employers who reported doing both jumped to its highest level in at least five years. By mid-1999, 72% of those eliminating jobs during the previous 12 months said they had also created new positions.

Such staffing changes clearly reflect the imperatives of today's fast-paced New Economy. Among the half of respondents who indicated they had cut jobs, only 15% cited the traditional rationale of inadequate demand conditions, whereas 70% cited such reasons as organizational restructuring, reengineering of production, and the adoption of new technologies. And just 14% mentioned a merger or acquisition.

Significantly, business restructuring and reengineering are also playing an increasing role in job creation. According to the AMA's survey director, Eric Rolfe Greenberg, five years ago such factors were cited far more as a rationale for job cuts than for job additions. Today, almost as many companies report they are adding jobs for such reasons as say they are cutting them. And more say automation and new technology are leading to job gains.

At last count, in mid-1999, a quarter of respondents said they had actually downsized in the prior 12 months--that is, had reduced their total workforce. While that was up from 1998, the companies as a group created five new jobs for every three jobs cut--a net gain of 5%.

Since last year's AMA survey, there's evidence that the tight job market may be slowing the pace of layoffs--if not the pace of expansion. According to outplacement firm Challenger, Gray & Christmas Inc., which tracks corporate layoff plans, job cut announcements in January were below their year-earlier level for the fifth straight month.

Still, there's one group of employees who may be feeling more heat in today's red-hot performance-driven economy. While their jobs aren't being eliminated, Challenger reports that the number of departing CEOs of major companies has soared since mid-1999, rising from 32 in August to 95 in January.

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