What Makes America Great: Layoffs!

[Better Believe It]

What Makes America Great: Layoffs!
By Barry Ritholtz
September 1, 2010

I am watching Squawk Box (CNBC) around 6:30am as I get dressed this morning. The conversation turns to various incentives in Germany, where firms are actually paid not to lay people off in a downturn. (Firms cut hours, but keep most of their staff). The lower German unemployment rate of 7% has less people with financial hardship, so the public continues to work, spend, save, invest, engage in all manner of economic activity. We are told this is the reason Germany’s economic data — employment, sentiment, retail consumption, etc. – looks so much more robust vs. the US.

But the German approach of maintaining taxpayer supported employment is immediately criticized. Any discussion such as this — more taxes! — must immediately be criticized.

A guest notes that in the US, a recent report finds CEOs that engage in the greatest number layoffs are rewarded with the highest levels of pay and bonuses; apparently, this is proof of its appropriateness. Guest host Andrew Ross Sorkin makes an effort to argue that the cuts are short term, some of these companies have cut too far into the bone — and is mostly steamrolled. The massive USA layoffs are defended, erroneously acknowledges as a Tragedy of the Commons. (The correct dilemma they were looking for is the Paradox of Thrift).

Now for the fun part: Not only is the German approach of less layoffs, better sentiment, higher economic activity not worthy of much actual debate, it is actually unAmerican (well yes, because its German). The layoffs in the USA are defended as raising productivity to record levels, and (at least over the short term) enhancing profits. One of the hosts suggest this high level of productivity “Is what makes America great.”

Gee, I always thought it was creativity, entrepreneurship, innovation, risk taking, economic opportunity, and freedom.

Turns out it was productivity enhancing layoffs.

Go figure.

http://www.ritholtz.com/blog/2010/09/what-makes-america-great-layoffs/

[HughBeaumont]

1. The Case Against Layoffs:

http://www.newsweek.com/2010/02/04/lay-off-the-layoffs.html

On Sept. 12, 2001, there were no commercial flights in the United States. It was uncertain when airlines would be permitted to start flying again—or how many customers would be on them. Airlines faced not only the tragedy of 9/11 but the fact that economy was entering a recession. So almost immediately, all the U.S. airlines, save one, did what so many U.S. corporations are particularly skilled at doing: they began announcing tens of thousands of layoffs. Today the one airline that didn't cut staff, Southwest, still has never had an involuntary layoff in its almost 40-year history. It's now the largest domestic U.S. airline and has a market capitalization bigger than all its domestic competitors combined. As its former head of human resources once told me: "If people are your most important assets, why would you get rid of them?"

It's an attitude that's all too rare in executive suites these days. As the U.S. economy emerges from recession, Americans continue to suffer through the worst labor market in a generation. The unemployment rate dipped in January, from 10 percent to 9.7 percent, but the economy continued to lose jobs. There are currently 14.8 million unemployed, and when you count "discouraged workers" (who've given up on job seeking) and part-time workers who'd prefer a full-time gig, that's another 9.4 million Americans who are "underemployed." While the pink slips are slowing as the economy rebounds, the lack of jobs remains the most visible—and politically troublesome—reminder that despite what the economic indicators may tell us, for much of the population, the Great Recession hasn't really gone away.

Companies have always cut back on workers during economic downturns, but over the last two decades layoffs have become an increasingly common part of corporate life—in good times as well as bad. Companies now routinely cut workers even when profits are rising. Some troubled industries seem to be in perpetual downsizing mode; the U.S. auto industry, to take just one example, has been shedding employees consistently for decades. (NEWSWEEK is familiar with these pressures: its head count is down significantly in recent years.)

(snip)

For many managers, these actions feel unavoidable. But even if downsizing, right-sizing, or restructuring (choose your euphemism) is an accepted weapon in the modern management arsenal, it's often a big mistake. In fact, there is a growing body of academic research suggesting that firms incur big costs when they cut workers. Some of these costs are obvious, such as the direct costs of severance and outplacement, and some are intuitive, such as the toll on morale and productivity as anxiety ("Will I be next?") infects remaining workers.

But some of the drawbacks are surprising. 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. 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. A recent study of 20 Organization for Economic Cooperation and Development economies over a 20-year period by two Dutch economists found that labor-productivity growth was higher in economies having more highly regulated industrial-relations systems—meaning they had more formal prohibitions against the letting go of workers.

[BrklynLiberal]

2. there is less and less that makes America great these days.