The Wages of Downsizing
I made my way to the front of the auditorium where 100 or so current and prospective members of Congress were filling the seats. The Democratic Caucus had invited me, along with other political, academic, and business experts, to participate in a panel discussion on what promises to be the key question of the presidential election: Has the average American worker benefited from the economic gains of the past several years?Joseph Stiglitz, chair of the president's Council of Economic Advisers, spoke first. Freshly armed with an election-year report that suggests the economic anxiety workers feel is largely a figment of their imagination, Stiglitz implied the media and ambitious politicians have fooled American workers into thinking their jobs are in jeopardy.As Stiglitz beamed over the creation of 8.5 million new jobs since 1993, I shuffled through my notes, which included these facts: More Americans have been laid off since 1993 than in any previous three-year period since the government started counting in 1979, and workers' salaries have remained stagnant for the past 20 years. I was dumbfounded that an administration elected with the help of organized labor would try to put a positive spin on the plight of working Americans.Stiglitz's study, the basis for an April 22 article in the New Yorker, is part of a backlash against the current spate of media attention given to downsized employees. Recent, widely quoted stories in Newsweek and the New York Times have criticized layoffs, but haven't addressed downsizing's end result any better than have Clinton administration officials or conservative commentators. Downsizing doesn't necessarily make companies smaller or more efficient or boost their long-term profits; downsizing drives down wages.For the past year, since the publication of my book Corporate Executions, I have crisscrossed the country and heard countless stories of workers moving from job to job trying to make ends meet on a dwindling paycheck. On one television call-in show, callers told me about lost jobs, broken marriages, and meager retirements: "No one will hire me because of my age"; "I've been to over two dozen job interviews and they always say the same thing, that I'm overqualified"; "I can't find another job that will pay enough to live on after I pay daycare expenses."These are the "broken eggs" that conservative New York Times columnist William Safire smugly dismisses as necessary for the "prosperity omelet."I, too, once believed in the dogma of downsizing. Fresh out of graduate school with a Ph.D. in psychology and eager to make my mark on the corporate world, I naively took commands from higher-ups. Sure, I was laying off employees but, let's face it, most were outdated, skill-deficient workers anyway.Over the course of my years as a corporate "hit man," I sat at many a boardroom table and listened to senior executives lash out about "deadwood" employees, "paycheck entitlement," and the need for some "new blood." All told, I personally fired hundreds of employees and planned for the batch firings of thousands more. Once I sat in a room at AT&T where employees' fates were decided by moving their photos -- attached to small magnets -- around on a large panel similar to a chessboard.Slowly, I began to see what really happens after a layoff. Morale hits rock bottom. Lines of communication within the company shatter. Productivity ebbs while high-priced consultants try to patch the business back together.Evidence that downsizing is bad for both companies and employees goes far beyond my own anecdotal experience. During the past decade, studies have shown a mass layoff often doesn't help a company, and, at worst, it can be the deathblow to a faltering enterprise. The lost time, waning productivity, and devastated morale create hidden costs, which can far outweigh the usual cost-savings predicted from a layoff.Nonetheless, the corporate love affair with downsizing continues. The casualty estimates vary widely, ranging from the conservative figure of 3.1 million publicly announced layoffs since 1989 to the much-debated New York Times tally of 21.2 million in the same time period. The Bureau of Labor Statistics forecasts that one out of every 20 working Americans will get laid off this year.These cuts are necessary, we are told. "Our reduction and other actions are absolutely essential if our businesses are to be competitive," explained Robert Allen, CEO of AT&T, last January as he announced the layoff of 40,000 workers (while he pocketed more than $5.2 million in salary). Again and again, in speeches reminiscent of the parental adage "This hurts me more than it hurts you," corporate chiefs hand out expedient rationalizations. Some claim the mass layoffs are necessary to keep their businesses in operation, arguing that the firings actually protect jobs. Others point to charts showing how their "re-engineered" organizations will miraculously accomplish more with fewer employees. Still others, tapping into the insecurity of workers struggling to keep pace in the Information Age, blame layoffs on their employees' lack of technological skills.The downsizing -- or "rightsizing" in current corporate lingo -- myths keep growing, embellished with each telling and validated not by reality, but by their own repetition and the status of their many narrators.MYTH ONECompanies that "downsize" get leaner.A headline from the San Jose Mercury News sets the record straight: "Shrinking Firms Are Hiring." Sound like an oxymoron? The article goes on to explain, "Companies that have been 'downsizing' their employment base have begun hiring new workers at nearly the same rate as they lay others off."This revolving-door style of hiring-while-firing has become the employment status quo. Two large-scale studies, one by the national management consulting firm Wyatt Co. and the other by the more than 80,000-member American Management Association (AMA), both found that downsized companies don't necessarily shrink. The Wyatt study discovered that the majority of managers refill some positions within two years. The AMA study showed that of 1,003 companies, the average workforce at the 501 companies that downsized in 1994-95 shrank by a meager 1.1 percent, even though these companies laid off nearly 7.7 percent of their employees.This is "binge and purge" staffing: Hire when you feel optimistic; lay off when business is down. No other company represents this story of corporate bulimia better than Apple Computer. Once considered one of America's most creative and revolutionary companies, Apple began a slow and painful dance with the downsizing ideology in 1985 when it laid off 1,200 employees (about 25 percent of its workforce). The layoffs continued for 11 years until more than 6,000 employees -- more than Apple's total employment in 1985 -- had lost their jobs. Despite Apple's high restructuring costs, amounting to $198 million in 1991 alone, Apple's total employment continued to grow, adding more than 13,000 jobs by 1995.The same hiring-while-firing pattern holds for American middle management, whose ranks, according to popular myth, have greatly shrunk. In fact, a 1995 Wall Street Journal story showed the number of managers at all the companies reporting to the Equal Employment Opportunity Commission has remained constant at 5 million since 1990. Further, mammoth corporations like Aetna Life & Casualty Co., American Express, and Procter & Gamble -- all of which have laid off large numbers of workers -- report an increase in the number of managers per 100 employees during the same period. In a recently published book, Fat and Mean, economist David Gordon points out that American companies are as middle-management-heavy as ever.This is not to suggest that a middle management slaughter isn't taking place. Middle managers and supervisors accounted for one-third of all layoffs in the AMA survey for 1995. So what gives? Companies are firing high-paid managers and hiring less experienced managers at a lower pay to take their places.MYTH TWOLayoffs make American business more productive.Little evidence supports this widely accepted myth. While downsizing has proved very effective for a few organizations like General Electric and Xerox, layoffs haven't helped most companies realize any increase in overall productivity.In a survey by the AMA, whose member organizations employ one-quarter of the country's workforce, 62.8 percent of human resource managers reporting layoffs said that worker productivity either had stayed the same or had decreased after a layoff.One study, whose authors included two governors of the Federal Reserve Board, found that manufacturing firms that upsized during the 1980s contributed about as much to the economy's overall productivity as those that downsized. The study also found that increases in productivity were due to differences between companies and not due to internal changes in the same company over time (i.e., downsizing).Consider what happens after a layoff. The loss of accumulated job knowledge is like an organizational lobotomy. It leaves a sluggish, bumbling organization that must relearn even the most basic functions. Compounding the problem, the company's top performers often jump ship. They have other job options and they exercise them. And why shouldn't they? If the ax fell once, it could fall again.One way layoffs supposedly make business more competitive is by replacing obsolete workers with advanced technologies. But technology hasn't leveraged manpower or eliminated many jobs. Only 19.7 percent of the downsized companies in the AMA survey for 1994-95 said that automation contributed to the layoff. In the four previous years, that number averaged 11.3 percent.The related claim, that workers are laid off because they don't have the technological skills to compete, is equally suspect. Most jobs don't require high skill. Neal H. Rosenthal, the co-author of one Bureau of Labor Statistics study, points out, "You can't forget that 40 percent of our jobs still can be learned in less than a month and are generally low-paying."MYTH THREENew and better jobs are being created to replace those lost to downsizing.While there is no doubt that new jobs have been created over the past four years, these jobs aren't the salvation the Clinton administration had hoped. Had it not been for manic downsizing, the economy might have produced 12 million new jobs -- not 8.5 million -- since 1993. As Brian Wesbury, chief economist for Congress' Joint Economic Committee, notes, "In the three recoveries that have lasted this long since World War II, job growth was a lot stronger."Moreover, many of the "new" jobs aren't new at all; they are merely recycled jobs created from tasks left by laid-off employees.The majority of jobs that were created are entry-level positions. With the passing of long-term job security, these jobs will probably never mature into high-paying positions. The Clinton administration has yet to produce conclusive evidence that the long-term stagnation of the average U.S. wage has reversed. The Economic Policy Institute reports that, even in the "professional specialty" job category, median wages actually declined by 1 percent from 1994 to 1995.There are those who ditto the Rush Limbaugh theory that layoffs force Americans to become successful entrepreneurs, and who proclaim a layoff to be the best thing that could ever happen to corporate "bureaucrats." Linda Anderson, founder of Big Blue Alumni International, a news and information resource for ex-IBMers, says otherwise. Anderson, who works with thousands of laid-off IBM employees, sees a disturbing trend among those who have struck out on their own. As contract employees, they do not receive vacations, medical benefits, bonuses, or the advantages of internal corporate programs. Many are forced to work for contracting agencies -- a type of middleman for employees -- driving their wages even lower. Says Linda Anderson, "We have created a second-class workforce that is silent and huge. It is good for big business and piss-poor for the worker."MYTH FOURDownsizing makes companies more profitable and, in the end, this benefits workers.William Safire, an exponent of the grit-your-teeth-and-bear-it school of thought on layoffs, argues that "the United States has shown how slimmed-down producers deliver more value for consumers, more profits for investors, and -- because only the fittest companies survive -- more security for workers."For workers, who rarely see layoffs as increasing their job security, this is a bitter pill to swallow. And while many companies are more profitable in the months following a layoff, workers haven't seen these record gains sweeten their paychecks. Since 1990, corporate profits have jumped 50 percent, reaching the highest after-tax levels in 25 years. Nonetheless, for all but the highly educated and highly paid, wages have steadily declined. Wages and benefits increased only 2.7 percent between 1994 and 1995, the lowest increase since 1981 when the Department of Labor began measuring. Meanwhile, the average CEO's paycheck rose 23 percent in 1995 to a whopping $4.37 million.While conservatives deny wages are declining, the figures are tough to refute. Seventy percent of the workforce had lower pre-tax compensation (wages and benefits) in 1994 than in either 1979 or 1989. From 1979 to 1994, the total compensation paid the median worker fell by 5 percent.Some downsizing defenders claim workers benefit, through their employee pension plans, from the layoff-driven market gains. Because defined-benefit pension plans are heavily invested in stock (the average is 43 percent), these investments have done quite nicely over the past 18 months. This, they say, is the silver lining that will compensate workers for the sacrifice.On a closer look, however, the cloud is still dark. Ronald Boller, vice president of investments for Owens-Illinois Inc., told Business Week: "Very few of us put any money into the pension funds.... We haven't had to put a nickel in our fund for years." In fact, many companies are using the investment windfall to avoid making contributions to the pension fund rather than to increase benefits. In 1995, the average pension fund increased by 25 percent, but benefits only increased by 3 or 4 percent.Finally, even the corporate profit increases attributed to downsizing may be illusory. Many companies are creating high short-term profit levels by consuming their own fiscal and human capital, as CEO Albert "Chainsaw" Dunlap did when he laid off 10,500 employees and sold $2.2 billion of Scott Paper's assets. Companies have abandoned the traditional sources of sustained profit for the quick hit of a layoff. "Increased profitability in the 1990s is not the result of greater investment or an acceleration of productivity," states a report from the Economic Policy Institute. "Business profits have been fueled by stagnant or falling wages." According to the report, hourly compensation would have been 4 percent higher in 1994 had profit rates been held to the more moderate levels earned from 1952 to 1979 and the remainder placed in wages.Strip away the myths and what remains is an ugly truth: Management uses layoffs to lower wages and make a quick profit. Bypassing the hard work of strategic planning, executives increasingly take the shortcut of a layoff.However, downsizing is not just a matter of shortsightedness, but of self-interest. Wall Street believes downsizing equals lower wages and bigger profits, and rewards CEOs who announce big layoffs by driving up their company's stock price. Since CEOs typically receive big chunks of stock, their net worth spirals up, just as their unlucky workers are wondering how they're going to make the mortgage payment.The accelerating pace of layoffs has steadily lowered the standard of living for working Americans. Not only are wages decreasing, but the safety net that protects workers against such catastrophes as chronic illness or long-term disability has all but vanished. Layoffs are also eating away at retirement funds and life savings.But there are alternatives to this corporate narcissism. As more Americans wake up to their lower standard of living, politicians and their pollsters are starting to pay attention. The GOP reached a political watershed this past winter when Republican presidential candidate Pat Buchanan horrified the party by condemning corporations -- many of which contribute millions of dollars to the political right -- for their mass layoffs. So deep are the populist roots of this anger, not even the party's spin doctors could stop the Buchanan insurgence.The Democrats now recognize that the GOP could co-opt their waning allegiance to labor. House Democratic leader Richard Gephardt is preparing legislation to slow the pace of layoffs and hold wages steady. Stopping short of legal restrictions, Rep. Gephardt's approach would provide a mix of corporate incentives and deterrents to protect workers.Some companies have resisted the downsizing fad on their own. Under David Packard (who died last March), Hewlett-Packard survived turbulent times by adopting a "fortnight" program: Every other Friday, it shut down almost all of its facilities and asked employees to take the day off without pay. And despite plenty of opportunity to take on large defense contracts, Packard refused if he would have to staff up to handle the work and then lay off employees when it was complete.David Packard's compassionate capitalism has paid off in spades. Hewlett-Packard has doubled its revenue over the last five years. Notes John Jones, an analyst at Salomon Brothers, "There are very few $30 billion companies that are growing 20 percent a year and are as profitable as HP."Other companies, such as Georgia-Pacific, avoid layoffs by using voluntary buyout programs. Employees have the option of accepting a certain amount of money for every year they have worked for the company. Employees who wish to leave can then take the check, and move on.But the most powerful brake on the rush to downsize remains public pressure. When AT&T announced its layoff of 40,000 employees, the company's stock rose $2.62 a share overnight. A month later, when public opinion had swung decidedly against the company, the stock began to fall. By mid-March, it had lost almost $7 a share, diminishing CEO Robert Allen's personal holdings in the company by $5 million. AT&T began to whittle away the total layoff figure, saying it would now try to find jobs for 6,000 of the workers.Pressure from customers can have an impact, too. In 1993-94, Pacific Gas & Electric, the country's largest energy utility company, laid off 3,000 workers. Extended rains in the spring of 1995 caused power outages for millions of customers in Northern California, many of whom went without service for days while PG&E's skeleton crews worked overtime. It took angry customers about 90 minutes to reach a human voice at the company's understaffed customer service department. PG&E had to hire 250 additional customer service personnel and cancel the planned layoff of 800 workers to solve the customer relations nightmare. Ironically, the company had claimed the layoffs would "improve customer service."Sometimes, even small protests can help. One labor attorney canceled his AT&T long-distance service shortly after the company announced the big layoff. He received a call from a customer service representative inquiring why. "Because I can't do business with a company that unnecessarily lays off so many workers," answered the lawyer."But what difference does that make to you?""Think of it this way: I'm trying to protect your job."The representative was quiet for a moment and then said softly, "Thank you," and hung up.