Myth Four

Downsizing makes companies more profitable and, in the end, this benefits workers.


William Safire, an exponent of the grit-your-teeth-and-bear-it school of thought on layoffs, argues that “the United States has shown how slimmed-down producers deliver more value for consumers, more profits for investors, and — because only the fittest companies survive — more security for workers.”

For workers, who rarely see layoffs as increasing their job security, this is a bitter pill to swallow. And while many companies are more profitable in the months following a layoff, workers haven’t seen these record gains sweeten their paychecks. Since 1990, corporate profits have jumped 50 percent, reaching the highest after-tax levels in 25 years. Nonetheless, for all but the highly educated and highly paid, wages have steadily declined. Wages and benefits increased only 2.7 percent between 1994 and 1995, the lowest increase since 1981 when the Department of Labor began measuring. Meanwhile, the average CEO’s paycheck rose 23 percent in 1995 to a whopping $4.37 million.

While conservatives deny wages are declining, the figures are tough to refute. Seventy percent of the workforce had lower pre-tax compensation (wages and benefits) in 1994 than in either 1979 or 1989. From 1979 to 1994, the total compensation paid the median worker fell by 5 percent.

Some downsizing defenders claim workers benefit, through their employee pension plans, from the layoff-driven market gains. Because defined-benefit pension plans are heavily invested in stock (the average is 43 percent), these investments have done quite nicely over the past 18 months. This, they say, is the silver lining that will compensate workers for the sacrifice.

On a closer look, however, the cloud is still dark. Ronald Boller, vice president of investments for Owens-Illinois Inc., told Business Week: “Very few of us put any money into the pension funds…. We haven’t had to put a nickel in our fund for years.” In fact, many companies are using the investment windfall to avoid making contributions to the pension fund rather than to increase benefits. In 1995, the average pension fund increased by 25 percent, but benefits only increased by 3 or 4 percent.

Finally, even the corporate profit increases attributed to downsizing may be illusory. Many companies are creating high short-term profit levels by consuming their own fiscal and human capital, as CEO Albert “Chainsaw” Dunlap did when he laid off 10,500 employees and sold $2.2 billion of Scott Paper’s assets. Companies have abandoned the traditional sources of sustained profit for the quick hit of a layoff. “Increased profitability in the 1990s is not the result of greater investment or an acceleration of productivity,” states a report from the Economic Policy Institute. “Business profits have been fueled by stagnant or falling wages.” According to the report, hourly compensation would have been 4 percent higher in 1994 had profit rates been held to the more moderate levels earned from 1952 to 1979 and the remainder placed in wages.