Facts about downsizing

by on February 27, 2004 at 5:26 am in Economics | Permalink

Downsizing occurs when a firm lays off workers to economize on costs. So what do economists know about this phenomenon?

1. About half of all downsizing firms end up with at least as many laborers within a few years’ time. Downsizing is often a matter of restructuring a labor force, not just getting rid of dead wood. In other cases downsizing may be purely temporary, and is reversed once the firm has some extra cash.

2. Downsizing in manufacturing is nothing new and has been going on since 1967. That being said, the smaller manufacturing firms generally have been increasing employment. The notion of “regression toward a mean” describes the manufacturing sector better than the universal downsizing hypothesis.

3. Downsizing is positively correlated with the degree of foreign competition in a sector. So trade does encourage firms to cut their costs.

4. Manufacturing is fifteen percent of the U.S. labor force and thus only a small part of the downsizing story. Retailing and services have been upsizing considerably for many years.

5. Downsizing firms tend to increase their profits but not their productivity. Downsizing commonly leads to lower wages within the downsizing firm. There is evidence for the “wage squeeze” story.

From the recent Downsizing in America: Reality, Causes and Consequences, by William J. Baumol, Alan S. Blinder, and Edward N. Wolff.

The authors conclude the following:

…no special programs appear to be called for, aside from measures to ease the transition of downsized workers to other jobs…the evidence provides no support for the conjecture that the economy is undergoing widespread and protracted reductions in the size of the typical firm’s labor force.

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