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What are some potential problems with downsizing as an organization's first response to a need to cut labor costs?

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Since you have put this in the business section, I assume that you are asking about the business reasons (as opposed to reasons having to do with society as a whole) that downsizing can be a bad idea.  Here are some of the reasons for this.

  • Morale.  When a company starts to lay workers off, the other workers may start to lose their morale.  They may worry that they will be the next to be cut.  As they worry, they may become less productive.
  • Inability to rebound.  Often, the sorts of economic problems that can lead to downsizing can be followed by a rebound.  When the rebound happens, orders may start to flood in.  If the firm downsizes, it may find itself unable to adjust when business picks up again.
  • Customer service.  If a firm lays off a large number of people, it can make it less appealing to customers.  It is possible that the quality or speed of production will drop, making customers unhappy.  A reduction in staff whose job is to interact with customers may reduce customer happiness as well.

For reasons like these, it is not wise to reflexively downsize in hard times without carefully considering whether there are alternatives.

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