Case Against Layoffs: Killing workers (literally), the economy — and even the bottom line

In today's slash-and-burn labor economy, Newsweek's latest cover story will be blasphemous to many of America's titans of industry: "Lay Off the Layoffs — Our over-reliance on downsizing is killing workers, the economy — and even the bottom line."

Could it be that the millions of Americans who have been left jobless in the Great Recession are suffering for naught?

Jeffrey Pfeffer, professor of organizational behavior at Stanford University's Graduate School of Business, suggests just that in his almost 3,000-word manifest in the Feb. 15 issue of the magazine.

"Companies have always cut back on workers during economic downturns, but over the last two decades layoffs have become an increasingly common part of corporate life — in good times as well as bad." But "companies now routinely cut workers even when profits are rising ... to minimize hits to profits, not to ensure their survival." 

— Jeffrey Pfeffer, professor of organizational behavior at Stanford University's Graduate School of Business

Pfeffer, co-author of the new Hard Facts, Dangerous Half-Truths and Total Nonsense: Profiting From Evidence-Based Management, details the ill that layoff can cause, including some surprising ones. 

"Even if downsizing ... is an accepted weapon in the modern management arsenal, it's often a big mistake," Pfeffer writes. "In fact, there is a growing body of academic research suggesting that firms incur big costs when they cut workers." These include:

• severance pay
• paying out accrued vacation and sick pay
• outplacement costs
• higher unemployment-insurance taxes
• cost of rehiring employees when business improves
• low morale
• risk-averse survivors
• potential lawsuits, sabotage, or even workplace violence from aggrieved or former employees
• loss of institutional memory and knowledge
• diminished trust in management
• reduced productivity

Other consequences are surprising. Conventional wisdom that large-scale restructurings automatically boost a company's stock price is nothing more than the equivalent of a corporate urban legend, Pfeffer writes. Three academic studies looking at more than 2,000 restructurings between 1979 and 1998 "found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects."

However, no consequence to companies is nearly as serious as those felt by downsized employees, Pfeffer says. "Layoffs literally kill people," he concludes, noting that Americans' health insurance is generally tied to their employment, and studies consistently show a connection between not having health insurance and individual mortality rates. He also cites a recent National Bureau of Economic Research report that showed U.S. job displacement leads to a 15%-to-20% increase in death rates in the following 20 years. This would extrapolate to a loss in life expectancy of 1.5 years for an employee who loses a job at the age of 40.

"Layoffs are mostly bad for companies, harmful for the economy, and devastating for employees. This is not news, nor should not be," Pfeffer concludes. "There is substantial research literature in fields from epidemiology to organizational behavior documenting these effects. The damage from overzealous downsizing will linger even as the economy recovers."