Contrary to popular belief, downsizing, even in the midst of a recession, does not pay, according to University of Stanford professor Jeffrey Pfeiffer. 

Writing in Newsweek magazine, Pfeiffer makes the case that oftentimes laying off employees proves to be more detrimental than beneficial for the company, the economy and the worker losing his or her job in the long-run. 

“Much of the conventional wisdom about downsizing—like the fact that it automatically drives a company’s stock price higher, or increases profitability—turns out to be wrong,” he writes.  “There’s substantial research into the physical and health effects of downsizing on employees—research that reinforces the seemingly hyperbolic notion that layoffs are literally killing people. There is also empirical evidence showing that labor-market flexibility isn’t necessarily so good for countries, either.” 

One of the most common misconceptions about downsizing is that it instantly results in a boost to stock prices.  But, according to Pfeiffer, this could not be further from the truth.  In fact, studying layoff announcements in the past two decades, Pfeiffer finds that in most cases stock prices fell after layoffs were announced.   

Nor does downsizing make a company more productive.  Companies often streamline their production processes, consolidate departments and extract more from their remaining workers when going through a period of layoffs.  But, data shows that companies that increase productivity are just as likely to hire workers. 

Restructuring a workforce is neither a good way to increase profits or cut costs.  A recent study found that downsizing often results in profits decreasing.  And oftentimes, when a company is going through a restructuring, it causes a great deal of anxiety among the workers still remaining at the company, so much so that many may leave for other jobs on their own.   

The fear that layoffs can create in the workplace is yet another unintended consequence of mass layoffs.  In that environment, workers are often nervous about their jobs, making them less productive and more likely to actively work against the company’s interests.

There are other more direct costs associated with layoffs as well.  Oftentimes they involve a severance package.  When business picks back up, employers must pay to recruit, train and hire new employees – sometimes a very costly endeavor. 

Not only that, layoffs tend to take their heaviest toll on those most affected.  Numerous studies have found a correlation between negative health outcomes and layoffs.  Stress, a lack of health insurance and other factors contribute to this.   

Mass layoffs also take a heavy toll on the economy.  When a business lays a worker off, that worker now has less money to spend, sapping demand for certain products and increasing the likelihood of more layoffs.  Those that remain employed may respond to the layoffs and their own anxieties by reining in their own spending, creating a vicious cycle. 
 
“Layoffs are mostly bad for companies, harmful for the economy, and devastating for employees,” he writes.  “This is not news, or should not be. 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—and as it does, perhaps managers will learn from their mistakes.”

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