The Wages of Downsizing (cont’d)


Stiglitz’s study, the basis for an April 22 article in the New Yorker, is part of a backlash against the current spate of media attention given to downsized employees. Recent, widely quoted stories in Newsweek and the New York Times have criticized layoffs, but haven’t addressed downsizing’s end result any better than have Clinton administration officials or conservative commentators. Downsizing doesn’t necessarily make companies smaller or more efficient or boost their long-term profits; downsizing drives down wages.

For the past year, since the publication of my book Corporate Executions, I have crisscrossed the country and heard countless stories of workers moving from job to job trying to make ends meet on a dwindling paycheck. On one television call-in show, callers told me about lost jobs, broken marriages, and meager retirements: “No one will hire me because of my age”; “I’ve been to over two dozen job interviews and they always say the same thing, that I’m overqualified”; “I can’t find another job that will pay enough to live on after I pay daycare expenses.”

These are the “broken eggs” that conservative New York Times columnist William Safire smugly dismisses as necessary for the “prosperity omelet.”

I, too, once believed in the dogma of downsizing. Fresh out of graduate school with a Ph.D. in psychology and eager to make my mark on the corporate world, I naively took commands from higher-ups. Sure, I was laying off employees but, let’s face it, most were outdated, skill-deficient workers anyway.

Over the course of my years as a corporate “hit man,” I sat at many a boardroom table and listened to senior executives lash out about “deadwood” employees, “paycheck entitlement,” and the need for some “new blood.” All told, I personally fired hundreds of employees and planned for the batch firings of thousands more. Once I sat in a room at AT&T where employees’ fates were decided by moving their photos — attached to small magnets — around on a large panel similar to a chessboard.

Slowly, I began to see what really happens after a layoff. Morale hits rock bottom. Lines of communication within the company shatter. Productivity ebbs while high-priced consultants try to patch the business back together.

Evidence that downsizing is bad for both companies and employees goes far beyond my own anecdotal experience. During the past decade, studies have shown a mass layoff often doesn’t help a company, and, at worst, it can be the deathblow to a faltering enterprise. The lost time, waning productivity, and devastated morale create hidden costs, which can far outweigh the usual cost-savings predicted from a layoff.

Nonetheless, the corporate love affair with downsizing continues. The casualty estimates vary widely, ranging from the conservative figure of 3.1 million publicly announced layoffs since 1989 to the much-debated New York Times tally of 21.2 million in the same time period. The Bureau of Labor Statistics forecasts that one out of every 20 working Americans will get laid off this year.

These cuts are necessary, we are told. “Our reduction and other actions are absolutely essential if our businesses are to be competitive,” explained Robert Allen, CEO of AT&T, last January as he announced the layoff of 40,000 workers (while he pocketed more than $5.2 million in salary). Again and again, in speeches reminiscent of the parental adage “This hurts me more than it hurts you,” corporate chiefs hand out expedient rationalizations. Some claim the mass layoffs are necessary to keep their businesses in operation, arguing that the firings actually protect jobs. Others point to charts showing how their “re-engineered” organizations will miraculously accomplish more with fewer employees. Still others, tapping into the insecurity of workers struggling to keep pace in the Information Age, blame layoffs on their employees’ lack of technological skills.

The downsizing — or “rightsizing” in current corporate lingo — myths keep growing, embellished with each telling and validated not by reality, but by their own repetition and the status of their many narrators. The column to the right presents the big four.

Strip away the myths and what remains is an ugly truth: Management uses layoffs to lower wages and make a quick profit. Bypassing the hard work of strategic planning, executives increasingly take the shortcut of a layoff.

However, downsizing is not just a matter of shortsightedness, but of self-interest. Wall Street believes downsizing equals lower wages and bigger profits, and rewards CEOs who announce big layoffs by driving up their company’s stock price. Since CEOs typically receive big chunks of stock, their net worth spirals up, just as their unlucky workers are wondering how they’re going to make the mortgage payment.

The accelerating pace of layoffs has steadily lowered the standard of living for working Americans. Not only are wages decreasing, but the safety net that protects workers against such catastrophes as chronic illness or long-term disability has all but vanished. Layoffs are also eating away at retirement funds and life savings.

But there are alternatives to this corporate narcissism. As more Americans wake up to their lower standard of living, politicians and their pollsters are starting to pay attention. The GOP reached a political watershed this past winter when Republican presidential candidate Pat Buchanan horrified the party by condemning corporations — many of which contribute millions of dollars to the political right — for their mass layoffs. So deep are the populist roots of this anger, not even the party’s spin doctors could stop the Buchanan insurgence.

The Democrats now recognize that the GOP could co-opt their waning allegiance to labor. House Democratic leader Richard Gephardt is preparing legislation to slow the pace of layoffs and hold wages steady. Stopping short of legal restrictions, Rep. Gephardt’s approach would provide a mix of corporate incentives and deterrents to protect workers.

Some companies have resisted the downsizing fad on their own. Under David Packard (who died last March), Hewlett-Packard survived turbulent times by adopting a “fortnight” program: Every other Friday, it shut down almost all of its facilities and asked employees to take the day off without pay. And despite plenty of opportunity to take on large defense contracts, Packard refused if he would have to staff up to handle the work and then lay off employees when it was complete.

David Packard’s compassionate capitalism has paid off in spades. Hewlett-Packard has doubled its revenue over the last five years. Notes John Jones, an analyst at Salomon Brothers, “There are very few $30 billion companies that are growing 20 percent a year and are as profitable as HP.”

Other companies, such as Georgia-Pacific, avoid layoffs by using voluntary buyout programs. Employees have the option of accepting a certain amount of money for every year they have worked for the company. Employees who wish to leave can then take the check, and move on.

But the most powerful brake on the rush to downsize remains public pressure. When AT&T announced its layoff of 40,000 employees, the company’s stock rose $2.62 a share overnight. A month later, when public opinion had swung decidedly against the company, the stock began to fall. By mid-March, it had lost almost $7 a share, diminishing CEO Robert Allen’s personal holdings in the company by $5 million. AT&T began to whittle away the total layoff figure, saying it would now try to find jobs for 6,000 of the workers.

Pressure from customers can have an impact, too. In 1993-94, Pacific Gas & Electric, the country’s largest energy utility company, laid off 3,000 workers. Extended rains in the spring of 1995 caused power outages for millions of customers in Northern California, many of whom went without service for days while PG&E’s skeleton crews worked overtime. It took angry customers about 90 minutes to reach a human voice at the company’s understaffed customer service department. PG&E had to hire 250 additional customer service personnel and cancel the planned layoff of 800 workers to solve the customer relations nightmare. Ironically, the company had claimed the layoffs would “improve customer service.”

Sometimes, even small protests can help. One labor attorney canceled his AT&T long-distance service shortly after the company announced the big layoff. He received a call from a customer service representative inquiring why. “Because I can’t do business with a company that unnecessarily lays off so many workers,” answered the lawyer.

“But what difference does that make to you?”

“Think of it this way: I’m trying to protect your job.”

The representative was quiet for a moment and then said softly, “Thank you,” and hung up.

Alan Downs, Ph.D., is an industrial psychologist and business writer in New York City. His recent book on layoffs, Corporate Executions, was published by the American Management Association.