Lay Offs- Down Sizing vs Demoralizing

Published by MBA Skool Team, Published on June 02, 2011

Lay-off or redundancy, is the temporary suspension or permanent termination of an employee or a group of employees for business reasons, such as when certain positions are no longer necessary or when a business slow-down occurs. Initially the term layoff meant a ‘temporary’ interruption in work, as and when factory-work cyclically falls off but nowadays it means ‘permanent’ elimination of a position. Another such word downsizing is the "conscious use of permanent personnel reductions in an attempt to improve efficiency and/or effectiveness". Downsizing has gained strategic legitimacy and is being regarded by management as one of the preferred routes to turning around declining organisations, cutting costs, and improving organizational performance, generally as a cost-cutting measure. Apart from the layoffs, employee promotions are also stalled.

Lay Offs

However, Lay-offs or job-cuts, as they are generally known, are of not much help to the economic progress of a country. They are irrational at the macro-level and at the same time rational at the micro-levels of the economy. In the wake of the economic slowdown, this is evident by the job-cuts on a large scale by larger companies than the smaller enterprises. Lay-offs are done to cut costs, the cumulative result of which is to depress demand for what all companies produce in the aggregate. This, in turn, accelerates slowdown and further releases pressure to cut costs. To intervene at the macro-level and to stop this vicious cycle, Governments announce fiscal stimulus packages to boost demand. 

The effect of lay-off is felt not only by the laid-off staff alone, but also dampens the spirits and morale of those who remain on the rolls and an unknown fear of further down-sizing haunts them. Thus, the degraded self confidence of the employees also takes a toll on the performance. They too cut down their expenditure drastically or postpone spending on luxurious commodities like buying a car, home, TV etc, which again hits demand in the economy adversely. All employees, whether laid-off or under the fear of lay-off, postpone purchases to worsen the slowdown scenario, as they have little support from their seniors.

To prevent companies from laying-off workers, Government should offer ‘temporary’ tax-breaks to companies. This incentive would refrain them from lay-offs and job-cuts and would protect current cash flows or a tax-credit linked to the company’s wage-bill.  The credit could carryover to whenever the company starts paying tax like in many software companies, where they pay little tax due to tax-breaks on exports. During boom, individual companies encourage hiring liberally but during lean periods they get rid of non-performers and save on cost. This attitude is justified perfectly for individual companies. Since economic slowdown is a phenomenon born mainly out of fall in aggregate demand, therefore such individually rational decisions add up to an irrational setback to economic growth and investment.

In order to overcome any economic crisis, certain temporary measures are essential that would be discarded or discontinued once the economic growth revives and normalcy returns. Widening of the fiscal deficit is also welcome as far as tax deferments by the government, during economic slowdown is concerned. One of the reasons for India being in a position to insulate itself from the global crisis was India’s non-dependence of other economies for its income. Tax breaks and additional expenditure, especially in the infrastructure sector, helped boost the fiscal deficit in the short run.

Layoffs will therefore not help in any way to control economic slowdown but may worsen economic progress, by dampening the spirits and attitude of the workforce. Thus, instead of layoffs, organisations should promote work place flexibility and provide support to their employees to regain belief and confidence.

The articles in this section have been submitted by our Authors. They have been reviewed & uploaded by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.

If you are interested in writing articles for us, Submit Here

Share this Page on:
Facebook ShareTweetShare on Linkedin