Downsizing: What Is a Workforce Reduction?
No one likes to think about it, but workforce reductions are a part of the economics of running a business. Labor has seen ups and downs through time, spanning from working conditions, to shifts in the types of jobs, to the salaries and benefits provided. Demand for workers can vary for a number of reasons. As innovation continues to try to hack away at traditional jobs, the topic of workforce reductions is likely to intensify dependent on what side of the equation you are on.
Downsizing almost always has to do with cost reductions. The laying off of workers on a large scale is an attempt to streamline a business. Sometimes a business is simply looking to move in a new direction, and no longer needs the labor force it once had.
Other times workforce reductions might come from shareholder pressure. Though perhaps not the most moral of occurrences, activist shareholders have been known to pressure companies to increase earnings, and downsizing can be one of the tools to achieve that end.
Another catalyst for workforce reductions can be rapidly increasing wages or benefits. If salaries become too inflated, and a company locks itself into an unsustainable position, it may be forced to trim its overall workforce to compensate.
Another recent example was last May when Legg Mason announced 120 job cuts after Activist investor Nelson Peltz gained a spot on the board. He immediately advocated strongly for cost cuts, which included the workforce reduction.
Current Workforce Woes
Currently, we’re seeing a forced workforce reduction as a way to prevent the spread of the coronavirus, as well as workforce reductions by industries that are being negatively impacted by the outbreak.
This is a unique situation. On the one hand, many industries are getting hit by a fallout in demand by the consumer. This applies to airlines, as world travel has decreased as people try to avoid getting sick. Consumers are not looking to travel right now, creating a demand shock. In turn, companies like United Airlines (UAL) - Get Report are trying to damper the hit to their financials.
United is planning to decrease its flight schedules by 50% due to a lack of customers looking to fly. Moreover, it is attempting to seek ways to cut costs. These moves include reducing executive pay by half, and has gotten into seeking compensation cuts from its unions. CEO Oscar Munoz gave indications in a letter to employees that considerations include furloughs, pay cuts, and layoffs. The company has warned that without government funds, the job cuts seem inevitable.
While the airlines are a major macroeconomic example, this virus and subsequent reaction are threatening the workforce in several ways. States like Pennsylvania have had non-essential commerce stalled out almost completely. Gov. Tom Wolf ordered the closure of all non-life sustaining businesses on March 19. This includes things like mining, lumber, construction, much of manufacturing, car dealers, schools— the list goes on and on. During that shutdown, you’re going to see lost wages.
In New York, Gov. Cuomo announced an order for a 100% workforce reduction for non-essential services. Though arguably a short lived workforce reduction in practice, this will lead to lost wages for a huge number of workers. It will also lead to massive revenue losses for businesses.
An Unpleasant Part of Business
No one likes to hear about workforce reductions. Unfortunately, they do happen. In modern times, with the onslaught of automation, they are happening more and more as corporations find ways to cut their labor costs. Down the line, this will likely become an ever more controversial topic within the world economy.