Downsizing has become a fact of life throughout the world. The term downsizing has come to mean terminating employees when the organization is still viable and has work for employees to do. Historically, downsizing white-collar workers was a rare event, and these employees could reasonably expect that if they performed well they would keep their jobs as long as the organization existed. A couple of decades ago that all changed. Now downsizing is common, driven by mergers, acquisitions, recessions, incentive-driven decisions to show a short-term boost in quarterly profits, and ideologically driven market signaling. Downsizing is now done for so many different reasons that shareholders, analysts, employees, and local communities struggle to interpret and understand an organization’s downsizing. Even in the public sector, once considered safe from downsizing, employees increasingly find themselves at risk for downsizing, and public-sector managers must make decisions they never expected to make. What is more, downsizing can be a traumatic, life-altering experience for everyone involved. For these reasons, it is probably one of the most important decisions that executives make. In the past few years, scholars have tried to understand this increasingly important phenomenon. Because downsizing has such powerful effects, it cries out for the systematic and dispassionate knowledge that scholarship can bring.

Cary Cooper, Alankrita Pandey, and James Campbell Quick have done an outstanding job of gathering together the leading scholars from a wide variety of disciplines focusing on the behavioral causes and consequences of downsizing. All of the chapters draw on or report carefully designed empirical research that seeks to dig deeper into the consequences of downsizing, and the reasons why executives decide to let employees go. Here readers will learn what drives the decisions to downsize, and the effects of differing ways to do it. A number of chapters address the effects of downsizing on the remaining employees, and its effects on those who have lost their jobs. Here readers will find the best of our current knowledge about downsizing. This book organizes and clarifies what we know about downsizing and is a pioneering contribution to the study of this vital subject. There is something here both for scholars interested in research on downsizing as well as for interested general readers who want to separate fact from ideology on the human and social causes and consequences of downsizing.

Employee downsizing – the phenomenon

Globalization and rapidly changing industry conditions over the past couple of decades have dramatically increased the competitive pressures faced by most corporations. To stay ahead in this more competitive environment, firms are being forced to constantly reevaluate their current strategy. Often this entails a reexamination of existing cost structures and the exploration of efficiency enhancing options. In this context, it should come as no surprise that employee downsizing has become an integral part of organizational life in corporate America. While downsizing is not a new phenomenon, it was only during the major economic downturn in the early 1980s that we started to see high levels of employee reductions for reasons other than job performance. Prior to that, such reductions were often temporary, with employees laid off during downturns being recalled when business conditions improved. More recently, firms have often engaged in employee downsizing of a more permanent nature. Radical restructurings undertaken in response to increased, often foreign, competition and the desire on the part of firms to drastically reduce payroll costs have often meant plant closures and permanent layoffs. Indeed, employee downsizing has emerged as an important weapon in the arsenal of many managers seeking enhanced efficiency and improved firm performance. As Datta, Guthrie, Basuil, and Pandey (2010, p. 282) suggest, “given its magnitude and impact, employee downsizing can legitimately be viewed as one of the most far reaching and significant management issues of the current era.” Very importantly, what used to be a primarily US practice has now become a global phenomenon with large-scale layoffs becoming commonplace in European and Asian corporations.

We have all seen the headlines: “The Worst Recession since the 1930s,” “More Foreclosures, More Bankruptcies, and More Layoffs.” Although the recent economic decline in the global economy has spawned many attention-grabbing news stories of job loss, organizational downsizing in reality has been implemented in large numbers for the past 25 years. It has been estimated that roughly 2,000 employees were downsized in American corporations each business day throughout the 1990s (De Meuse and Marks, 2003). According to the US Department of Labor (2011), this number rose to more than 4,000 employees each business day between 2000 and 2007. And certainly, layoffs have increased markedly during the past few of years of economic difficulty – not only in America but around the globe.

Nearly two decades ago, we delivered a presentation at Cornell University entitled, “Is lean and mean really better than fat and happy?” (De Meuse, Vanderheiden, and Bergmann, 1993). The research tracked the financial performance of corporations that downsized during a five-year period relative to those firms that did not. Although the findings were not a ringing endorsement of large-scale layoffs, they point out an interesting observation. Given the length of time organizations have been implementing downsizing and the frequency in which they occur, one would expect companies to be highly effective at it. And yet, this does not appear to be the case. Numerous studies have reported that downsizing can lead to several adverse organizational outcomes, such as decreased employee morale and commitment, increased employee stress and involuntary turnover, and reductions in employee creativity and innovation (see Datta, Guthrie, Basuil, and Pandey, 2010; De Meuse, Marks, and Dai, 2011). In addition, several studies have found that an organization’s financial performance frequently does not improve in the near term (Cascio, 1998; Cascio and Young, 2003; De Meuse, Bergmann, Vanderheiden, and Roraff, 2004; De Meuse, Vanderheiden, and Bergmann, 1994). Cascio and Young (2003) concluded that “managers must be very cautious in implementing a strategy that can impose such traumatic costs on employees, both on those who leave as well as on those who stay” (p. 153).

The process of company downsizing needs to be considered in the framework of economic change, which occurs at the macro-level (whole societies) and at the micro-level (single organizations). We will first develop a conceptual frame in which to integrate a relatively heterogeneous body of empirical evidence. A selective review of study results on the health effects of downsizing among survivors follows in the next two sections. The first section concerns the health consequences for the remaining workforce and the more distant stressful conditions related to marked changes in employment. The second section analyzes the more proximal stressful conditions of restructuring at the micro-level of single organizations, with an emphasis on workers’ short-term and long-term health. Finally, some challenges for future research are identified and the policy implications of current knowledge discussed.

Theoretical background

Probably the most important link between economic change and adverse health is the notion of threat. Threat arises from a sudden or recurrent interruption of habitual living and working conditions – the individual’s established coping patterns are powerless to meet an undesirable challenge. Threat may fuel insecurity about one’s sense of mastery or even result in loss of control, with its associated negative consequences. This then may provoke sustained activation of the body’s innate stress axes and eventually trigger a variety of physical and mental disorders (Weiner, 1991; McEwen, 1998).

Job loss is painful. There are thousands of individual stories of workers who lose their jobs each year from all parts of the world. A great deal of work across the social sciences examines the causes and consequences of job loss. This chapter addresses a small part of that work and specifically focuses on the effects of job loss on workers (including the effects on subsequent wages and on health) and on the effects of job loss on companies (including short- and longer-run corporate performance). Other questions are also considered, such as whether firms are less committed to workers and workers less committed to firms than they were in the recent past. A variety of data sources are accessed for research on job loss, and consideration is given to the alternatives to job loss and the various public policies adopted in the United States and throughout the world.

To begin, it should be noted that this chapter will not focus on other important issues related to job loss. It will not examine, in significant detail, the effects of international trade or tariffs. The chapter is also not about labor turnover that is initiated by the worker. Voluntary quits and separations are not discussed, nor are firings for cause or strictly for performance.

The chapter examines instances where companies layoff employees (temporarily or permanently, although the focus is on the latter). It examines changes in the displacement of workers over time, reasons for the changes, and the effects on workers and companies. There is also a focus on policies, consideration being given as to whether there can be improvements to what is known and done about job loss, and a discussion of how other countries handle reductions in the demand for labor.

Downsizing, broadly conceptualized here as an intentional selective reduction in a firm’s physical and/or human capital (DeWitt, 1998), is most commonly equated with layoffs, one choice in a broad range of intentional workforce reduction alternatives (Cascio, 1993; Greenhalgh, Lawrence, and Sutton, 1988). Because of downsizing’s often detrimental effect on those let go (Leanna and Feldman, 1992; Newman, 1988; Uchitelle, 2006), it is difficult to promote the idea that downsizing might be considered great. But research suggests that downsizing can be good.

Insights into what makes downsizing good can be found in studies of the relationship between downsizing and a firm’s financial performance. First, downsizing does not happen without a reason. Erosion in corporate performance, either experienced or expected, precedes use of workforce reductions (Datta, Guthrie, Basuil, and Pandey, 2010; Wayhan and Werner, 2000). Second, poorly executed downsizing, including large employment cuts and across the board cuts, triggers negative market reactions (Nixon, Hitt, Lee, and Jeong, 2004; Worrell, Davidson, and Sharma, 1991). Thirdly, short-run financial improvements are evidenced when employment cuts are part of corporate refocusing (Nixon et al., 2004; Wayhan and Werner, 2000) or asset restructuring (Cascio, Young, and Morris, 1997). Additionally, where short-run financial erosion occurs, longer-run financial recuperation may follow (De Meuse, Bergmann, Vanderheiden, and Roraff, 2004). But, many of these studies focus on market reactions to very large, diversified, publicly traded company announcements. As it is hard to discern what a firm did other than at the most coarse of levels, questions remain regarding how “good downsizing” is obtained. What are investors reacting to? Is it the change in the relative weight of the business units within the portfolio or the change in the size of the corporate staff? Is it change in the way business units are positioned within their market? Or, perhaps more appropriately, is it the relative effectiveness of the change; how does the change being undertaken by a particular firm compare to the changes being undertaken across the firm’s competitive context? Answers to these questions, though important, are not this chapter’s focus.

Introduction

This book and the scholarly literature agree that firms engage in workforce downsizing for many reasons. Downsizing generates a myriad consequences and implications at organizational, subgroup, and individual levels of analysis (Gandolfi and Hansson, 2011; Datta, Guthrie, Basuil, and Pandey, 2010).

The body of literature on downsizing is substantial, reflecting the prevalence of this management practice in the United States, the United Kingdom, Canada, Europe, Australia, New Zealand, and Japan, and it is also spreading to other regions. The majority of the downsizing research has been conducted in the United States and Europe (Datta et al., 2010). Still, the contraction of workforces has not been confined to US firms, but has occurred throughout the world (Ryan and Macky, 1998). Empirical evidence shows that downsizing and its many related concepts has been particularly pervasive in, for example, North America (Freeman, 1994), Britain (Thornhill and Saunders, 1998), Canada (Dolan, Belout, and Balkin, 2000), Japan (Griggs and Hyland, 2003; Mroczkowski and Hanaoka, 1997), Australia (Gandolfi, 2006a), New Zealand (Macky, 2004), South Africa (Littler, 1998), Western Europe (Lamsa and Takala, 2000) and several countries in Eastern Europe (Redman and Keithley, 1998; Filatotchev, Buck, and Zhukov, 2000). It is also evident that downsizing as a strategy has not been limited to established economies but has also been employed in developing countries, including African and Latin American countries (Jones, Jammal, and Gokgur, 1998) and transitioning economies (La Porta and Lopes-de-Silanes, 1997).

Introduction

Too many managers and scholars alike may overlook post-downsizing. There are important considerations in the aftermath of a downsizing event, some of which very much need to be anticipated as the downsizing process begins. These considerations include:

• effects on the organization,

• outcome goals (e.g., surviving versus revitalizing), and

• effects on individuals.

A key question here is: what are the impacts a downsizing climate has on people and their relationship to work? The primary concern of this chapter is the human side of the business and the effects of downsizing on individuals. There are five groups of individuals that are impacted by the downsizing process. These are:

• employees and managers who are downsized and lose their positions as a result (primary casualties);

• employees who survive the downsizing and remain within the organization (secondary casualties but survivors);

• managers who orchestrate and execute the downsizing event (secondary casualties but survivors);

• spouses, family members, and loved ones who have personal, intimate relationships with those who are let go in the downsizing process as well as those employees and managers who remain (secondary casualties);

• external spectators, care givers, and community members who are witness to the downsizing event and may either have direct or indirect contact with any or all of the above-mentioned groups (tertiary casualties).

The process of downsizing is defined as the “planned set of organizational policies and practices aimed at reducing the extant workforce with the goal of improving firm performance” (Datta, Guthrie, Basuil, and Pandey, 2010, p. 282). It is a very complex process, far more so than research following only an economic or institutional view would suggest (McKinley, Zhao, and Rust, 2000). Whether the impetus to consider downsizing is a reaction to organizational decline or competitive pressures, the impact resulting from the design and execution of the entire process is deeply rooted within the organization and much deliberation and care must go into the proactive planning and implementation of the workforce reduction to temper or eliminate negative outcomes (Cameron, Freeman, and Mishra, 1991). Involving multiple actors and units of analysis, downsizing must be studied in ways taking into account this complexity in order to capture the full effects resulting from such a critical strategic decision.

Downsizing is an intentional process focusing on improving organizational efficiency through the reduction of employees (Cascio, 2010). The effects of downsizing on the workforce are both foreseen and unforeseen (Huber and Glick, 1993). Organizations undertake downsizing with the assumption that it preserves profitability by enhancing organizational efficiency and reducing costs (DeWitt, 1998; Freeman, 1994; Harrigan, 1980). However, the extant research shows that downsizing yields mixed results. For example, it has been found to have positive effects (Baumol, Blinder, and Wolff, 2003; Bruton, Keels, and Shook, 1996; Espahbodi, John, and Vasudevan 2000; Wayhan and Werner, 2000), negative effects (Cascio, 1993; Cascio, Young, and Morris, 1997; Caves and Kreps, 1993; Lee, 1997; Palmon, Sun, and Tang, 1997; Worrell, Davidson, and Sharma, 1991), or no effects (Cameron et al., 1991) on firm performance. These disparate outcomes are in part due to the inherent complexity of downsizing.

Employment downsizing, the planned elimination of positions or jobs, is a defining characteristic of modern life in organizations. It may be reactive (in response to a change in economic or organizational conditions) or proactive (executed in anticipation of such changes). In the most recent economic recession, downsizing was global in scope, with 8.5 million layoffs in the United States and more than 50 million worldwide. As Datta, Guthrie, Basuil, and Pandey (2010) have noted, in these turbulent economic times even countries that traditionally have avoided layoffs (e.g., South Korea, Japan, Taiwan, and Hong Kong) embraced the practice. Export-oriented and labor-intensive firms in China, and firms in both manufacturing and services industries in Britain, Canada, Australia, New Zealand, South Africa, South America, and Eastern Europe participated as well. Not surprisingly, therefore, employment downsizing has attained the (dubious) status as one of the most high-profile, significant, and pervasive management issues of our time. Over the past three decades, downsizing has occurred in virtually all industries and sectors of the economy, and it has affected business, governments, and individuals around the world (Cascio, 2010a; Gandolfi, 2008).

Although employment downsizing is a multifaceted phenomenon, characterized by antecedents, implementation, and consequences, this chapter addresses just three issues: what it is, what causes it, and some things we still do not know (i.e. directions for future research). The chapter does not consider other aspects of downsizing, such as its costs, consequences, or alternatives to it, that provide a more complete picture of the full scope of this phenomenon. For more on those issues, see other chapters in this volume or consult Cascio (2002, 2010), Datta et al. (2010), or De Meuse, Marks, and Dai (2011).