The Shortsighted Solution


Layoffs and Their Consequences

By Louis Uchitelle

Knopf -- 283pp -- $25.95/h5>

( below)

Editor's Review

Four Stars
Star Rating

The Good An incisive critique of corporate downsizing and mass layoffs.

The Bad Uchitelle?s policy proposals are hardly innovative.

The Bottom Line An airtight case against the common wisdom that favors job cuts.

Some economists call it the hedonic treadmill: The way many Americans work (all the time) and live (in an arms race for status) conspires against the happiness they say they crave. We're the richest, most powerful country in the world. But an increasing amount of hard data shows that as our ability to own homes and cars and TVs has increased, so have our rates of addiction, depression, and economic inequality. These findings are causing some economists and policymakers, including New York Times economics reporter Louis Uchitelle, to raise questions about whether we've sacrificed too much for growth. After all, if we're not achieving the greatest happiness for the greatest number, why, asks Uchitelle in his important new book, The Disposable American, does the pursuit of growth still rule economic ideology?

Fundamentally, Uchitelle's book is about what he views as the folly of the modern layoff -- one of the inevitable results of an economy designed for nonstop expansion. Uchitelle draws upon mounds of research to show that slashing staff in the name of growth does not, in the long run, lead to better stock performance. Yet CEOs, their thinking warped by Wall Street-induced short-term-itis, continue to hack away. The more anorexic their payrolls, the more obese the CEOs' pay packages. This culture, in which employees are treated as if they have sell-by dates, Uchitelle says, has huge, oft-ignored costs, and he rails against the idea that there's no alternative to reduction in forces. He describes the problems, especially the psychological fallout, so well that one yearns for more innovative solutions. But his prescriptions differ little from those backed by progressives since at least the 1930s. Still, the logic with which he lays waste to commonly accepted layoff rationalizations is airtight.

Rationalization No. 1: Layoffs save money. What that equation misses, says Uchitelle, are hidden costs that include severance, potential lawsuits from aggrieved workers, loss of institutional memory and trust in management, a shortage of staff when the economy rebounds, rehiring expenses, and a culture of survivors who are risk-averse, paranoid, and alienated. Contrast that with the evidence Uchitelle marshals to argue for a no-layoff payoff: fierce loyalty, higher productivity, and superior innovation at such companies as Southwest Airlines (LUV ) and Harley-Davidson (HDI ).

Slide Show >>

Rationalization No. 2: So what if the labor market is a game of musical chairs where workers routinely get bounced? There are lots of good jobs, at least for the college-educated. Uchitelle's opinion, shared by a growing group of economists, is that, to the contrary, there just aren't enough well-paying jobs with decent benefits to meet demand. Today's low jobless figures miss all the people who are "bought out" but really exiled, who are "free agents" but really traded back and forth in the global discount labor bazaar. One of The Disposable American's most poignant anecdotes involves a 47-year-old executive who, after 25 years with Procter & Gamble (PG ), loses her $150,000 a year job in a buyout. Then, when one of the cheaper young staffers hired to replace her falters, she is rehired as a "consultant" -- at $75 per hour for three to five hours a week. There's also the laid-off sixtysomething who strenuously works his alumni network only to net zero job offers, even though he has degrees from Harvard and Wharton. His depressing conclusion? His education hurt him by setting him up for expectations that he can never fulfill.

Many say that, in the end, layoffs will bring about a reenergized, dynamic U.S. economy, one that will eventually lead to another era of equilibrium. In contrast, Uchitelle argues that the rampant income volatility produced by a layoff-happy business culture is creating a society of downwardly mobile, insecure workers. The problem is that today's social infrastructure was built for the Company Man, not for the you're-on-your-own free agent. In this great risk shift, burdens once shared within society are being transferred onto employees' shoulders.

That's why Uchitelle argues that America needs a new social safety net. His fixes include a passel of liberal reforms: a more progressive income tax, a government jobs program, an increase in the minimum wage, laws requiring severance packages, and stronger labor regulations. He knows that many will balk at these shopworn ideas. But instead of relying on logic to make his case, he appeals to Americans' sense of well-being: People who live in societies where these elements are a given, he correctly reports, say that they are more content. Similar results are reported by those who feel their work is stable. With such realities, Uchitelle says, layoffs should be the last place CEOs turn -- not the first.

By Michelle Conlin

    Before it's here, it's on the Bloomberg Terminal.