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Why do companies do mass layoffs? How do they harm companies and employees, even those who aren’t laid off?
From tech to banking to consumer goods, industry giants like Amazon and Coca-Cola are laying off thousands of workers—even while profits are strong. Mass layoffs are a deceptively damaging tactic that hurt company profits, productivity, and culture.
Read on to learn more about the damaging effects of mass layoffs, including possible alternatives.
Mass Layoffs—A False Solution
This year, the U.S. has seen mass layoffs from industry leaders across sectors: Morgan Stanley, Google, Microsoft, Disney, and Walmart are just a few of the corporate giants handing out pink slips en masse.
The odd thing is that most of these companies are slashing workers while making healthy profits. For example, Tesla cut 10% of its workers despite having one of the strongest quarters in the company’s history. This is in stark contrast to the historical view of layoffs as an emergency relief valve when a firm’s budget gets too tight.
Big tech appears to be leading the pack, as Twitter, Meta, and Amazon collectively sacked thousands of workers despite strong company performances. As one Stanford business professor put it, many businesses are cutting workers because they see other firms doing it. (Ironically, one study claims that layoffs hurt profits more in the tech sector than other industries because tech firms’ main value comes from their staff, like software engineers and app developers.)
In this article, we’ll examine how mass layoffs hurt companies and workers alike, plus some alternatives to mass employee layoffs.
A Look at Big Tech Layoffs
The technology industry seems to be struggling as the world emerges from the Covid pandemic and life returns to in-person normalcy. Well over 100,000 tech workers lost their jobs in 2022—in November alone, various tech companies announced around 34,000 layoffs, including 11,000 layoffs by Meta and 10,000 by Amazon. This is part of a larger trend in the technology sector, which has seen share prices falling for much of 2022, including a massive $400 billion drop at the end of October. Some people are worried that the shrinking tech sector is a sign of larger economic problems to come—however, many economists don’t believe that’s the case.
Why So Many Layoffs?
To begin, let’s examine why major tech companies are struggling in the first place.
Experts believe that there are two major drivers behind the mass layoffs. First, the Covid pandemic created enormous demand in the technology sector as people moved much of their lives and work online. Now, as people are starting to meet and work in person again, many tech companies (who may have assumed that pandemic life was the “new normal”) are finding themselves with more employees than they can use.
Second, economic growth—especially in the U.S., where many of the largest tech companies are based—is slow and threatening to get slower. In fact, many economists believe that the U.S. is likely to enter an economic recession within the next year. As a result of that projection, many companies are trying to reduce spending and build up a financial buffer, which they’re doing in part by reducing their workforces.
The good news is that, despite nearly 120,000 tech jobs disappearing this year, unemployment among tech workers is still quite low. This likely means that the tech sector isn’t shrinking as some people fear; rather, a few large companies created a bubble based on overly optimistic predictions, and now the market is correcting itself. Furthermore, now that a few giants aren’t monopolizing the talent pool anymore, smaller companies and interesting new projects have their own chances to grow.
Finally, economists say that these layoffs are probably not a sign of a looming recession. They explain that tech jobs are a relatively small part of the overall job market, and that sudden spikes of layoffs in that sector haven’t led to recessions in the past.
Layoffs Hurt Companies …
So, how do mass layoffs harm companies? By the 2000s, mass firings became common enough that most Americans accepted them as part of working life. But despite the hype, the tactic generally did more harm than good.
In fact, research reveals that layoffs seldom deliver results in any of the areas that executives commonly use to justify large-scale firings.
- Profits: A 1997 study found that mass layoffs had a negligible impact on a firm’s profits, while a 1994 study noted that companies’ profitability actually decreased after layoffs.
- Stock prices: A survey of executives showed that organizations’ stock prices get a temporary boost after layoffs, but then they drop.
- Productivity: A survey revealed that most businesses see productivity dip after layoffs.
Organizations also risk losing institutional knowledge and having former employees land jobs at competing companies.
… and Workers
Mass layoffs don’t just look bad on paper—they also hurt workplace culture. Research shows that after large-scale firings, the “surviving employees” suffer: They have to shoulder the work of their laid-off colleagues, carry on without the camaraderie of those missing, and live with the fear that they could be next on the chopping block. As a result, turnover increases, morale drops, and workers often become risk-averse, self-absorbed, and narrow-minded.
Furthermore, laid-off workers face financial hardship as well as social and emotional struggles.
First, despite executives’ rhetoric framing layoffs as strategic budgetary decisions that don’t reflect workers’ performance, job loss still carries stigma. Laid-off workers suffer from immense stress and feelings of failure that can impose long-term damage to their self-esteem.
Additionally, fired employees often struggle to find new jobs, as research shows that being unemployed lowers your chances of landing a job, and the odds get bleaker the longer you’re out of work. When they do find work, it’s usually for less money: A 2009 study reported that even 20 years after a layoff, fired workers’ incomes were still 20% less than those of employees who had been spared.
Alternatives to Layoffs
While there are valid reasons why a business might impose mass layoffs—including outsourcing, automation, and updated job requirements—experts offer tactics to take some of the sting out.
One piece of advice: Give workers advance notice. For example, Nokia gave nearly 18 months’ notice before closing its factories.
Also, help terminated employees find new jobs. For instance, Nokia spent millions developing a program to help workers go back to school, launch their own businesses, and look for jobs.
Finally, if possible, try to avoid mass layoffs entirely. Instead, consider taking other measures like salary cuts, buy-outs, and furloughs.
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