Layoffs often do not cut costs, as there are many instances of laid-off employees being hired back as contractors, with companies paying the contracting firm. Layoffs often do not increase stock prices, in part because layoffs can signal that a company is having difficulty. Layoffs do not increase productivity. Layoffs do not solve what is often the underlying problem, which is often an ineffective strategy, a loss of market share, or too little revenue. Layoffs are basically a bad decision.
For healthy employees without pre-existing health conditions, the odds of developing a new health condition rise by 83% in the first 15 to 18 months after a layoff, with the most common conditions being stress-related illnesses, including hypertension, heart disease, and arthritis. The psychological and financial pressure of being laid off can increase the risk of suicide by 1.3 to 3 times. Displaced workers have twice the risk of developing depression, four times the risk of substance abuse, and six times the risk of committing violent acts including partner and child abuse. The stress induced by a layoff can even impair fetal development.
If several decades’ worth of research now shows layoffs to be a poor way to boost profits, while other strategies may in fact work, perhaps there are ways of changing the dynamic between what’s happening on Wall Street and decisions that get made in the board room and on the shop floor. Says [Wharton School of Business Professor] Cobb: “The challenge is: how do we get back to a more socially responsible way of handling employment given the influence of financial markets on corporate decision-making?”
As a group, the downsizers never outperform the nondownsizers. Companies that simply reduce headcounts, without making other changes, rarely achieve the long-term success they desire.
The authors found that layoffs have a negative impact on a firm’s reputation and that this relationship is significantly stronger for newer firms than older firms. Limited support is found for the hypothesis that larger firms’ reputations will be buffered from the adverse effects of a layoff on their reputations.
A study of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects. An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing. Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement.
In an effort to understand how layoffs influence victims’ subsequent work behaviors, a team of researchers from the University of Wisconsin-Madison’s Wisconsin Business School examined the impact of layoffs on voluntary turnover. Charles Trevor, professor of management and human resources and chair of the department, together with Ph.D. student Paul Davis, and Ph.D. student Jie Feng found that, all else equal, employees with a layoff history were more likely to voluntarily leave organizations. […] “This is consistent with the business press frequently characterizing layoffs as leading to a free agent mentality, where the workforce is made up of a significant group of employees with low levels of commitment and loyalty to the employer.”
Laurence's study looked at a sample of nearly 7,000 individuals in the U.K. to investigate the psychological effects of being laid off. The question asked was, "Generally speaking, would you say that most people can be trusted, or that you can’t be too careful in dealing with people?" The answers ranged from "most people can be trusted" to "can't be too careful" to "depends." The respondents were asked this question at age 33, and then again 17 years later, at 50. […] Laurence found that individuals who experienced a layoff were 4.5 percent less likely to trust even 17 years later. This effect was even stronger for individuals who placed a greater value on work and career, at 7 percent.
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