The Forgotten Costs of Layoffs

The Forgotten Costs of Layoffs
(AP Photo/Michel Euler)
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As the pandemic drags on, the economic damage in the US is running deep and the unemployment and workforce systems are struggling to support the millions of newly unemployed workers. With our safety net systems on the verge of collapse, companies are continuing to lay off employees in droves. We often talk about the damage mass unemployment is doing to the economy overall and the unfortunate workers who lose their jobs, but what sort of effect do mass layoffs have on the companies themselves?

In major economic downturns, mass layoffs in the US are common and that is especially true this time around. Payroll and benefits are often the biggest expenses for any company and they are often the first place employers turn to cut costs, improve efficiency, and survive during difficult or uncertain economies. In the past, companies have frequently had reason to regret such moves, and permanent COVID layoffs are likely to be no different. In an ironic twist, trying to save a company by cutting staff has actually been shown to damage firms’ competitive standing as economic activity increases.

Workers are more than budget lines; they are company investments that have lifetime value. Any amount of training dollars or investments that have been made are lost the minute they are let go. Beyond that, recovering the skill sets and institutional knowledge of laid off workers as companies rehire down the road can be tremendously costly and time consuming. In fact, recruiting, training, and onboarding new employees can cost upwards of two times the salary of the individual they hired. That does not include the amount of time it takes for them to settle in and begin adding to the firm’s productivity. Laying off too quickly is like tying weights to your ankles before starting to run up hill.

Second, mass layoffs have a lasting effect on the workers that are left behind, especially when the cuts are instituted very suddenly as has often been the case during the pandemic. In fact, research has shown that productivity, workplace happiness, and team morale can diminish significantly when mass layoffs occur without “procedural fairness” (i.e. giving employees that are laid off time to begin their new job hunt, or giving time for teams staying on the job to prepare for the shift in job responsibilities). Building trust and developing a cadence for getting work done takes time. Disrupting team cohesion and work flows can devastate an organization’s ability to be productive in any capacity.

This brings us to our last point, organizations that delay or avoid layoffs as long as they can during economic downturns recover more quickly and are actually more productive and profitable in the long run. One of the reasons for this is the effect on the remaining workforce and its subsequent impact on productivity as noted above, but the other is the reduced ability to innovate. The knowledge and experience of the workers who spend every day immersed in the culture, processes, and business lines of these companies are what enables new innovations to emerge. At a time when it is imperative that companies change the way they operate in order to prosper, companies can ill-afford to lose the people who know the organization best.

At the end of the day, layoffs are inevitable in a pandemic that has hampered global supply chains and economic activity in every corner of the globe. Not every business will be able to afford to cover all of their payrolls if the tradeoff is losing the business altogether, but the companies that do all they can to avoid, delay or otherwise mitigate layoffs are going to come out the other end of this pandemic with a competitive advantage. Downsizing decisions should take into account these human capital considerations. If the idle time created by the pandemic can be used to invest in skill development and/or redeployment of talent to other business functions, companies will be in far better position to ramp up activity when demand resumes.

This is exactly the reason that the Paycheck Protection Program — whatever its challenges and flaws — has been so vital: it has preserved the most important asset any business or economy has; its people. More can be done — like expanded tax credits for human capital development or the leveraging of work sharing programs — to reduce the short-term costs to business and the suffering of workers while increasing the long-term economic returns for the country.

Brent Orrell is a resident fellow at the American Enterprise Institute. Matthew Leger is a research analyst at the American Enterprise Institute.

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