Alternatives to Layoffs in Recession – Why Aren’t They Used?

December 18, 2008 by  
Filed under Economics

The news yesterday that Chrysler was shutting down all of its U.S. factories for 30 days got me thinking about a larger question:  Why is it that in a recessionary economy, employers primarily use layoffs to cut labor costs?  Why don’t they look for alternatives?

By alternatives, I am referring to labor cost-cutting measures that allow employees to keep their jobs while lowering their costs of employment.

The Chrysler plant-idling strategy is one alternative.  Other labor-cost cutting measures we have seen include temporarily suspending 401(k) matching contributions.  But these cost cutting strategies are relatively rare and practically insignificant when compared to the hundreds of thousands of jobs that are simply eliminated when the economy goes south.

What else could employers do to cut labor costs and keep employees on the job?  The simplest strategy would be to reduce wages and salaries for everyone still working.  Instead of cutting ten percent of the workforce, reduce every employee’s pay by ten percent.  Wouldn’t that be better for both the employer and employee?

Apparently not because it rarely happens.  How often have you seen a headline such as “Jobs Saved by Rolling Back Pay Scales to 2003 Levels”?  I don’t recall seeing that recently. 

In some cases, of course, union contracts would prevent an employer from unilaterally cutting the wages of union employees.  OK – so how often have you seen this headline:  “Union Saves Members’ Jobs By Agreeing to Wage Cuts in Existing Contract”?  Don’t hold your breath waiting for that one.  Even the UAW – facing the imminent collapse of an entire industry – could only muster up a weak “we will think about cutting wages but don’t ask us when.  We’re too busy lobbying Congress and the White House for bailout money.”

Apparently this question of why employee terminations are the cost-cutting strategy of choice in a down economy has bothered economists as well.  In fact, an entire book has been written on the subject of why wages don’t fall during a recession.  Even today, consumer prices are falling at a pace not seen since 1933 but not wages.

I have not read the book (and don’t plan to) but Mr. ToughMoneyLove has his own hard truth theories on this subject, which seem to coincide with something stated in the book summary.  I believe that the fundamental problem with using wage cutting instead of job cutting is that most American workers cannot psychologically handle the pain.  We are all about raises and bonuses, both to feed our consumerism and our egos.  We would view wage cuts less as a reasonable means to keep people employed and more as a direct attack on our individual self-esteem.

I think that employers have figured that out as well.  They know that wage cuts would be immediately followed by a significant drop in employee morale.  And this would not be a temporary drop.  Most employees would be unable to move beyond the blows to their ego triggered by a smaller paycheck.  Unhappiness would be followed by loss of productivity.  (Internet use on the job would spike dramatically!)  The employers would conclude that they might as well have fired some of their employees to begin with so as to keep those left behind in a better mood. 

This theory of employee layoffs reminds me of a “demotivator” poster from Despair, Inc. that I have hanging in my office.  This poster cynically states:  “Sometimes the best way to improve employee morale is to fire all of the unhappy people.”  Sad but true.

I also suspect that some employers view economic downturns as a good opportunity to get rid of problem employees without taking so much heat from those employees who remain.  The bad economy provides good cover for the decision.  By “problem” employees, I mean those that have bad attitudes, poor performance, or simply make too much money.  And by “make too much money” I am referring to laying off the older employees.  What better way to avoid a claim of age discrimination than to take action during recession?

I won’t name names, but in my first job out of college, I recall twice being called into a full-department meeting so that the department managers could tell us about how bad things were in our industry.  We were told that this meant that staff reductions were necessary.  All of us would then jerk our heads around rapidly, trying to identify the victims by who was missing.  It was always the older engineers.  I was glad no one asked me to reduce my salary to save their jobs.  But the bottom line is that I don’t think my employer had any interest in saving their jobs.  Better to replace them with younger engineers who made less money. 

Is anyone else curious about the relationship between recessions and layoffs vs. wage cuts?

Photo credit: Marcel

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21 Responses to “Alternatives to Layoffs in Recession – Why Aren’t They Used?”
  1. Miranda says:

    Great insights! I think you are right that the recession makes a great cover for getting rid of some employees. Also, some companies cut back hours, or eliminate overtime. This saves money, but does not need to lead firings.

  2. I’ve recently witnessed this type of strategy first hand. A paper mill in a town not too far from my home has been struggling for a while. It told the union that it would either need to reduce labour costs, layoff workers, or shut down completely. A revised wage package was put forward that would have seen wage and benefit reductions, but would have allowed the vast majority of workers to keep their jobs. The union voted against this proposal (88%). The result? The mill was shut down for good last week. Rather than take a 15% pay cut, the employees now have been hit with a 100% pay cut.

    From media reports, many of the younger workers we in favour of the proposal, as it allowed them to keep their jobs and keep their town alive. However, the majority older workers were adamantly opposed, both based on principle and knowing that they only had a few years left anyway.

  3. This reminds me of the players union in Major League Baseball. If a player wants to go to a specific team but wants to take a pay cut for it to happen, they won’t let them. Why? It would “negatively impact” other players because he’s lowering his “value.” How messed up is that?

  4. G. Jules says:

    Another factor to consider: when benefits and/or salary are cut, some employees will leave, and those employees will tend to be the most motivated, talented employees — those who know they can get jobs elsewhere. If you’ll end up losing staff either way, wouldn’t you rather keep the talented ones?

  5. Miranda: Hopefully the employees who still have jobs because the employer cut back hours instead of firing them appreciate it.

    MGL: That mill story is one where selfishness triumphed reason. It makes you wonder sometimes why unions even exist.

    Writers Coin: That is messed up. My nephew is an MLB player – I need to ask him about that.

    G Jules: Good point and I think that does play a role in the layoff decision.

  6. Andrea says:

    Take a peek at this graph showing real wages. I know it was an arbitrary number, but rolling back wages to 2003 levels wouldn’t do anything.

    Besides that, though, wage cuts aren’t just an attack on self-esteem. With the trends in CEO to average worker pay going from something like 40x to 350x or something like that (I can’t remember exactly – I wrote something about it a few days ago on my own blog), it would be all out war. “You’re going to cut MY pay, you bloated bastard? I think NOT.”

    My position is being eliminated, which is a totally rational decision being made in a bizarre environment that I won’t even attempt to explain. I don’t have any hard feelings and am not taking it personally. Just looking around to see which door’s going to open now that this window has closed. :)

  7. glinka says:

    First of all there is no math for 401k to cut. You cannot cut 10% or 20% or even 50% of wages and have any savings. It’s all about capacity. Why build a vehicle that’s not selling?

  8. TStrump says:

    I’m just amazed that salary cuts are never considered even when a company on is on the verge of going broke.
    What does that say about our attitudes?
    … Sounds like entitlement without any concern about who is going to pay the price in the end.

  9. Melanie Reformed Spender says:

    I live in the same province as MGL and the worst part is that the same thing happened in another town in the province a few years ago. The workers wouldn’t accept the wage cuts (and freeze) proposed so they shut down the plant. The workers in the second mill should have known that final offer meant just that.

    However, one could argue that the company was going to be putting out of both mills eventually anyway.

  10. doctor S says:

    I think many company would be better off taking ur advice and doing some more analysis rather than just cutting everyone like the auto companies. Maybe be redefining business process and cutting some of the excess fat companies would find solutions instead of putting everyone at the chopping block? Who knows. Good luck to everyone.

  11. Dorothy Denham says:

    I wonder about the correlation between job layoffs and automation. I’ve seen it coming with banks and other jobs that deal with the public. When jobs started going overseas that seemed to catch everyones attention.Do you know anything about the automation aspect of losing jobs?

  12. Robert says:

    There are still high paying jobs on certain job sites – (professional networking) (keyword job search) (matches jobs based on skills)

    good luck to those looking.

  13. Todd says:

    I agree that it’s easier for companies to fire some than lower salaries for everyone. This also makes those that keep their jobs grateful, which is good for the company. The next thing the company does is lump all additional work from the fired people onto the survivors. The morale, after a while will deteriorate eventually, as it should when our security (or false sense of security) is continually threatened.

    Some companies as I’m sure you know have been stopping matching contributions and/or have canceled bonuses. To so some degree this is like a cut it pay since the average American considers his/her bonus as expected pay after a while and has already mentally spent the funds.

  14. S says:

    Its difficult for me to fire people in the good times, even the underachievers. Large layoffs (like 10%, I’m not talking mass layoffs like 40%) are a great opportunity for me to get rid of those that don’t add any value to the company. The overachievers are already underpaid, so I would definitely fight their salaries being lowered. When the good times return and I’m allowed to hire again, odds are I’ll, on average, get much better workers better than the ones let go.

  15. MasterPo says:

    I found out today that my company let go several highly experienced managers on the manufacturing side. These were guys who had been with the company for decades and really know the business. Real make-things-happen people. But they were at the higher end of the pay scale so it was simply a cost cutting manuver.

    Of course, I don’t see how getting rid of your most experienced and best performers will help you weather the storm and stay strong. But perhaps that’s why I’m not an executive (said tongue-in-cheek).

  16. You have to fight so hard to get a raise and work so long to be eligible for one, people naturally resist accepting cuts in pay. Also, for most people the cost of living expands to fill the amount of pay available. So, a cut in pay means increased personal debt, less likelihood of retirement or of a decent amount saved to keep one going in one’s senility, and an immediate cut in one’s standard of living. I don’t think it’s surprising that union members (who, after all, join a union to negotiate higher wages) vote against pay cuts. Especially when our Congressional leaders vote themselves a pay raise and the very crooks who helped bring about this mess are walking off with HUGE bonuses.

  17. Curt says:

    Excellent article. I was just talking about this with a friend of mine who is a Union carpenter. He has been laid off since November, alone with 850 others, yet the Union has no intention of reducing hourly wages – which are only renewed every three years and are much to high for todays housing market collapse.

  18. Kay says:

    My husband’s job reduced everyone’s pay by no longer paying a portion of health insurance. Our income was significantly impacted (7.5% decrease) and now the fear is that we will never see this benefit returned. They also cut back on vacation days and paid holidays.I would almost prefer that he got laid off and found a different employer. He really struggles with going to work now.

  19. Curt: There is lots of history of unions causing more harm to their members by taking unrealistic positions.

    Kay: I’m sorry that happened to your husband. The question is whether his employer had any real alternatives short of terminating a lot of employees.

  20. Atkins says:

    IBM is laying workers off even though it is profitable — and not just a little, but enough that the stock went up last time earnings were announced. The issue there is an apparent management goal to continue driving the stock up by pushing costs down. Jobs are being moved overseas to places where wages are significantly lower, like India. It appears to me that American IBMers will have to accept some sort of pay reductions until they come level with India, Brazil, etc. Currently the employees are very angry about this but are not doing anything more effective than having a tantrum.

  21. Mneiae says:

    Yes, UAW did not ask or agree for wages to be cut. There are a lot of reasons for wages to be sticky. It’s also more comfortable for the company to layoff people than for them to negotiate a lower salary with them. Speaking as the daughter of a UAW member, the union has agreed to several cost-cutting moves. For one thing, the college tuition benefits from the UAW-Ford Scholarship Program for Dependent Children? They’re gone. It was $885 per year for retirees, aka victims of the Ford layoffs, but it was a nice, small source of money. Everyone’s heard about Ford’s VEBA thing and Ford is auditing its employees to ensure that it is only covering those who can indisputably be proven to be covered by the Ford plan.

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