Myth Two

Layoffs make American business more productive.


Little evidence supports this widely accepted myth. While downsizing has proved very effective for a few organizations like General Electric and Xerox, layoffs haven’t helped most companies realize any increase in overall productivity.

In a survey by the AMA, whose member organizations employ one-quarter of the country’s workforce, 62.8 percent of human resource managers reporting layoffs said that worker productivity either had stayed the same or had decreased after a layoff.

One study, whose authors included two governors of the Federal Reserve Board, found that manufacturing firms that upsized during the 1980s contributed about as much to the economy’s overall productivity as those that downsized. The study also found that increases in productivity were due to differences between companies and not due to internal changes in the same company over time (i.e., downsizing).

Consider what happens after a layoff. The loss of accumulated job knowledge is like an organizational lobotomy. It leaves a sluggish, bumbling organization that must relearn even the most basic functions. Compounding the problem, the company’s top performers often jump ship. They have other job options and they exercise them. And why shouldn’t they? If the ax fell once, it could fall again.

One way layoffs supposedly make business more competitive is by replacing obsolete workers with advanced technologies. But technology hasn’t leveraged manpower or eliminated many jobs. Only 19.7 percent of the downsized companies in the AMA survey for 1994-95 said that automation contributed to the layoff. In the four previous years, that number averaged 11.3 percent.

The related claim, that workers are laid off because they don’t have the technological skills to compete, is equally suspect. Most jobs don’t require high skill. Neal H. Rosenthal, the co-author of one Bureau of Labor Statistics study, points out, “You can’t forget that 40 percent of our jobs still can be learned in less than a month and are generally low-paying.”

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