The negative consequences of haphazard layoffs

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Layoffs have eliminated more than 235,000 tech jobs since 2022, as the fear of a recession has prompted companies to brace for weaker revenue. 

It’s a standard play ahead of a downturn. Executives with a fiduciary responsibility to protect shareholders are conditioned to seek costs savings when their outlooks turn bleak. But bosses considering pulling the trigger on arbitrary job cuts might want to think twice, since research shows they probably cause more destruction than good.

“Layoffs are basically a bad decision,” says Jeffrey Pfeffer, a professor at Stanford University’s Graduate School of Business, in an interview published on the university’s website. The long-time layoff researcher says companies that institute job cuts lose money, weaken productivity and inflict mental, physical and financial harm on employees.

There are decades of research to back up Pfeffer’s statements. Layoffs are proven to result in lower profitability, according to a University at Texas at Arlington study, and another study found the effects persist for years. Still another study finds companies that cut staff are more likely to end up in bankruptcy.

Some of those profit losses stem from declines in productivity, since cutting staff means there are fewer people around to meet company goals. But the performance of employees left behind also suffers as they deal with a mixture of heightened anxiety, fear and survivor’s guilt that affects the quality and quantity of their work. Almost three-quarters of people who watched colleagues get pink slips say their motivation to work has fallen as a result, according to a recent survey by Bizreport.com of United States leaders and employees. Lower engagement is a known productivity killer, so it won’t be surprising that researchers have concluded that layoffs result in a 20 per cent loss in productivity.

Job cuts also risk sparking a talent exodus. The people left behind are 7.7 per cent more likely to find a new job within 105 days of the cuts, according to research by HR software maker Visier Inc. Anxious employees who fear layoffs are also a flight risk, and are 50 per cent more likely to plot a move somewhere else within a year, says a survey by Perceptyx Inc., a workplace analytics company. Companies that don’t factor in such losses could end up with fewer workers than anticipated, making morale even worse. Organizations are also bleeding experience and knowledge every time an employee walks out the door. Those costs add up, especially when managers must inevitably hire again, which is a challenge when labour shortages are expected to persist for years.

The damage doesn’t end there. A company’s brand reputation takes a hit after layoffs hit headlines, potentially hurting sales, research shows. Stock prices also get affected. A company’s shares may experience a temporary bump in price as investors back cost-cutting measures, but they usually end up suffering in the months and years ahead. Job cuts send a signal that a company is in trouble, researchers say, leading investors to put their money elsewhere.

“Layoffs may look good on paper because they have an immediate effect on costs,” Adam Cobb, a management professor at the Wharton School at the University of Pennsylvania, says. “Yet in reality there are a lot of costs that layoffs impose on firms that might not show up on an income statement quite as clearly.”

Of course, there are often good financial reasons why companies might need to cut jobs. Markets shift, revenue sources appear and disappear, economic hardship bites, and executives are forced to make hard decisions. For companies headed toward bankruptcy, job cuts are necessary to rein in costs.

But implementing layoffs just to put on a cost-cutting show is a different matter. Company impacts aside, poorly thought out cuts have disturbing consequences on the health of workers who have lost their jobs. 

“Layoffs kill people, literally,” Pfeffer says. People affected by downsizing are 2.5 times more likely to commit suicide, he says. They are also at higher risk of death in general, with mortality rates rising 15 to 25 per cent over 20 years, according to one study. That might be because layoffs cause huge amounts of stress, which go on to trigger physical health conditions. Previously healthy layoff “victims” are 83 per cent more likely to develop a serious health issue such as high blood pressure or arthritis, researchers Sandra Sucher and Marilyn Morgan Westner point out in a recent Harvard Business Review article.

And then there are the financial impacts. Getting laid off doesn’t just hurt income in the short term, but it can cut earnings for the rest of people’s careers. Workers laid off in the 1980s ended up earning 20 per cent less over 20 years than those who kept their jobs, researchers from Columbia University found.

The negative consequences speak for themselves, yet companies continue to use layoffs as the first line of defence in cost-cutting measures. That’s because layoffs are “contagious,” Pfeffer says. “If you look for reasons for why companies do layoffs, the reason is that everybody else is doing it.”

That effect could be playing out in real time. High-profile cuts at tech and finance companies such as Amazon.com Inc., Alphabet Inc., and Goldman Sachs Group Inc. are spreading to other sectors including retail, forestry and manufacturing.

Yet some employers are holding back the pink slips. For example, Canadian banks are planning to keep staff levels steady, even as their counterparts in the United States slash their workforces. Tech behemoth Apple Inc. has also avoided the job cuts of its peers. Such companies could be factoring in the depth of the recession. A short downturn, as some are predicting, may not necessitate deep cuts, meaning companies that hold the line could end up at an advantage.

There are times when layoffs make sense and restructuring is necessary. But in many cases, they are the result of poor management practices, experts say, and can be avoided with more creative cost-cutting measures. It might be too much to ask executives to consider the mental, physical and financial toll of layoffs on their employees. But at the very least, they might want to think about the consequences for their companies.

— Victoria Wells, senior editor, Financial Post, and FP Work editor 

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