Layoffs (Encyclopedia of Business)
Layoffs refer to either temporary or permanent employment reductions. Prior to the 1980s, layoffs generally resulted from business cycle downswings, which primarily affected industries such as manufacturing and mining. When the economy improved during this period, employers often recalled laid-off workers. Beginning in the 1980s and extending through the late 1990s, however, a greater proportion of layoffs resulted from plant and office closures, workforce reductions, or job eliminations. Consequently, these layoffs were permanent and workers who are laid off permanently are sometimes referred to as "dislocated workers."
Many of the layoffs in the 1980s and 1990s stemmed from reengineering, restructuring, and downsizing efforts to make U.S. firms more efficient and profitable in the face of intensified international competition. Layoffs resulting from reengineering and restructuring were unique in that restructuring affected a large proportion of white-collar, managerial, executive positions. For example, the American Management Association found that two-thirds of employees laid off in 1994 were salaried, college-educated workers.
Growth of foreign and domestic competition, stagnant earnings, and a slow economy motivated the first round downsizing and layoffs in the early 1980s. As the U.S. economy improved in the mid-1990s and remained strong in the late 1990s, large-scale layoffs continued at about the same rateven at highly profitable firmsarking a break with historical layoff patterns. During the late 1990s, many of the largest companies in the country underwent reengineering or downsizing, despite greater profits. General Motors, for example, continued to reduce its workforce, announcing in 1998 that it would cut 50,000 jobs to remain competitive, even though the company's profits rose 35 percent in 1997.
AT&T led U.S. companies in 1998 layoffs with 18,000, followed by Compaq with 15,000, Motorola with 15,000, Raytheon with 14,000, and Xerox with 9,000. Furthermore, McDonald's Corp. laid off workers for the first time ever during this period as the company began to reduce its overhead and management personnel in an effort to increase productivity.
A flurry of bank mergersore than 370 of themn the late 1990s also led to additional layoffs. The top five mergers of 1998 alone resulted in 20,000 job cuts. According to Fortune, banking along with media/entertainment and utilities jobs were the most prone to layoffs in the mid-to-late 1990s because of mergers, accelerated competition, and government deregulation.
Layoffs resulting from downsizing continued throughout 1990s, despite low unemployment, a strong economy, and the lack of proven economic benefits from downsizing. According to a Wharton School report, downsizing typically failed to boost earnings or stock market performance consistently. Moreover, other studies indicate that downsizing tends to cause low employee morale and tarnish a company's image. In addition, some reports found that a number of companies eventually are forced to fill positions left open by layoffs by paying premium wages.
Skilled workers such as computer programmers, software engineers, and tool-and-die manufacturers, however, remained insulated from the effects of downsizing during the late 1990s because of a nationwide shortage, according to Industry Week.
Unlike other advanced capitalist countries, firms in the United States faced with demand variations generally relied on changes in employment rather than changes in working hours. From 1970 to 1983, for example, variations in employment due to fluctuations in production were substantially greater in the United States than in Japan or West Germany. Changes in employment in the United States resulted mostly from temporary layoffs during downswings and recalls of laid-off workers during upswings. The greater reliance on overtime work in Japan and West Germany, rather than layoffs and recalls, may have been due to the fact that overtime is paid only a 25 percent premium in these two countries, compared with 50 percent in the United States. Furthermore, U.S. companies tend to layoff workers to avoid shareholder losses, whereas companies in other countries tend to pass both earnings and losses on to shareholders in order to bypass frequent layoffs.
SENIORITY AND LAYOFFS
According to a U.S. Bureau of National Affairs survey on layoff provisions in labor agreements, most labor agreements have some type of layoff provision, which specifies the terms and conditions of layoffs. Furthermore, when companies have labor agreements, seniority usually plays a role in determining who will be laid offnd seniority plays the only role in many cases. In addition, some labor agreements with layoff provisions allow a senior employee to "bump" or displace a junior employee in a different department or job classification should the senior employee's job be subject to layoff.
Senior employees are favored not only in layoffs but also in recalls, as the laid-off employees with the greatest seniority generally get called back to work first. In many labor agreements, all laid-off workers had to be recalled before any new employees were hired. Violations of such layoff provisions often resulted in union grievance procedures. Seniority also played an important role in the layoff criteria of nonunion firms. A 1982 survey revealed that 42 percent of nonunionized firms followed strict seniority rules in determining layoffs.
Most labor unions favored the use of seniority as the only criteria in determining who would be laid off. In addition, many unions favored "superseniority" in which union officers and stewards were granted highest seniority. Superseniority was favored on the grounds that union officers and stewards must be working in order to protect the rights of fellow workers. In contrast, firms generally preferred to first lay off workers they regarded as least productive. Firms were also generally opposed to bumping, as this often resulted in less-experienced workers taking over an operation.
UNIONS AND LAYOFFS
In their volume What Do Unions Do?, Richard B. Freeman and James L. Medoff addressed the question of why unionized workers were more affected by temporary layoffs than were nonunionized workers and responded as follows:
Why do unionized workers and firms [in the United States] choose temporary layoffs rather than reductions in wages or hours? Perhaps the most important reason is that temporary layoffs mean laying off junior workers, not the senior employees who have a greater influence on union policies than they would on the policies of a non-union firm.Except in the cases where mass layoffs are threatened, this will lead him or her to prefer layoffs to other forms of adjustment.
Freeman and Medoff argue that union members' preference for temporary layoffs, rather than worksharing, increased in the post World War II years, noting the decreasing number of union contracts with work-sharing provisions. In the face of plant shutdowns, however, unions have accepted not only worksharing measures but also substantial give backs in terms of wages and benefits.
The National Employment Priorities Act, which proposed that firms be required to give advance notice to workers of impending layoffs or plant closures, was first introduced in Congress in 1974. This legislation, introduced by Congressmen Walter Mondale from Minnesota and William Ford from Michigan, failed to gain sufficient congressional support. Similar laws were passed at the state level, however, with Maine and Wisconsin among the first states requiring firms to give advance notice. Congressman Ford reintroduced layoff notification legislation at the national level with the proposed Labor-Management Notification and Consultation Act of 1985. Advance notification legislation eventually passed in the form of the Worker Adjustment and Retraining Notification Act (WARN) of 1988. In general, WARN requires companies with more than 100 permanent, full time employees to give their workers from 60 days to six months of prior notice for plant closures and large-scale layoffs. If employers fail to comply with WARN, then laid-off employees or their unions can sue employers, following the 1996 Supreme Court ruling in United Food and Commercial Workers Union Local 751 v. Brown Shoe Co.
SEE ALSO: Corporate Restructuring
updated by Karl Heil]
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