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