Commentary—

Killing Jobs Is Bad For Business

By Kevin Shih

Corporate America loves layoffs. No matter the cost to the affected workers, many investors see job cuts as an encouraging sign that CEOs are making the tough decisions necessary to make their company “lean and mean.”

It’s striking that CEOs are being rewarded for mass firings at a time when unemployment is at the highest level in more than two decades. Last year, the CEOs of the S&P 500 companies raked in an average of $8.5 million. According to an upcoming report by the Institute for Policy Studies that I co-authored, the top executives who fired the most workers since the economic crisis began received substantially more compensation in 2009 than this “average.”

They don’t deserve these rewards. The extreme job losses that we’ve seen over the past two years, while producing immediate gains in profits and productivity, are likely to be bad for business in the long run.

University of Colorado Professor Wayne Cascio has conducted a series of studies that concluded that stable employers — companies that have less than a five percent staff turnover rate per year — tend to outperform most companies with a lot of layoffs. Surveys from the Society for Human Resources Management also back this finding. They found that after downsizing, companies’ profits increase only about a third of the time.

Recent Labor Department data suggest that even the short-term gains from layoffs may already be petering out. For the first time in two years, American productivity declined during the second quarter of 2010. The workers who’ve managed to keep their jobs may have reached their full potential.

The adverse impact of layoffs is more obvious for displaced employees. Several studies have shown that mass firings permanently decrease wages. An average worker losing a stable job at a good employer will experience a 20 percent pay cut lasting 15–20 years, according to Columbia University’s Till von Wachter. Being fired also leads to many unnecessary health risks, largely due to the loss of employer-based health insurance. The National Bureau of Economic Research has reported a 15–20 percent increase in death rates for displaced workers during the 20 years after they lose their jobs.

The long-term cost of mass layoffs doesn’t just stop there. With so many workers losing their jobs, people are buying less and paying less in taxes. Schools and social safety net programs are being gutted because state and local governments can’t raise the tax revenue needed to fully fund these programs anymore. That means mass layoffs squander long-term investments that have a direct impact on our country’s future.

Although in the short term big cuts in workforces could lead to record profits for corporations, in the long run they’re eliminating consumers while also making our country less competitive. This Labor Day, let’s hope that these CEOs actually start appreciating their workers, instead of treating them as a drag on profits.

(Kevin Shih is a 2010 Carol Jean and Edward F. Newman Fellow at the Institute for Policy Studies in Washington, D.C.)