Do layoffs improve the economic performance of companies?

Unlike the deep economic and social crisis that began in 2008 and lasted more than a five-year period, the causes of which were financial and global impact, the broad effect of the pandemic on the income statements and balance sheets of many companies of all countries. Economic sectors has been and continues to be deeply devastating. Revenues plunged into an abyss, remained in that pit month after month, with no real prospect of a comeback; In those companies that have not succumbed, the accounts recover timidly and gradually; however, recovery in many cases requires major surgery, always invasive and with associated risks. We know that epidermal treatment will not bring us back to health.

When we are still in the hangover of the disputed agreement between the social agents and the Government to extend the ERTE, temporary employment regulation files, and delay the dreaded ERE, employment regulation files, it is appropriate to review the effect of the dismissals on the business progress. When in our society everyone is affiliated with a philia or a phobia, it is time to separate the wheat from the chaff, that is, to distinguish what is true from what is not so.

On what is there empirical evidence in relation to firing decisions and their profitability?

The costs of layoffs are rarely properly calculated, not least because the lion’s share is not paid by the firing companies. The breaking of the psychological pact of reciprocal loyalty entails not only the severance pay, the costs of relocation, the increasing taxes due to higher unemployment, the costs of rehiring when the economy improves, the legal processes, and the costs due to unwanted violent acts; In addition, we must add the intangibles as tangible as the demoralization of those laid off, the aversion to risk of the survivors, the cultural and institutional dismemberment, the loss of knowledge and creativity to innovate, the erosion of trust until its dissolution and, as a worthy culmination, the loss of labor productivity.

Layoffs do not usually address the underlying problems of the competitive capacity of companies such as quality, productivity or acceptance by customers or the market; rather, on the contrary, they impoverish the capacity to generate value for those who buy goods and services, and therefore income, entering a downward spiral, from which it is almost impossible to get out.

Layoffs and cuts are not caused by improved business efficiency; Rather, the context, imitation or a prevailing trend unhappily explain these bloody ways of acting.

Layoffs are rarely explained by a positive impact on the share prices of the companies that carry them out, as is uncritically argued. In reality, if a company fires because things are going badly, it seems reasonable that the market is discounting it. Something else will have to be done, and maybe sooner.

Nor does the improvement in profitability undoubtedly support the use of redundancies. A study conducted on companies in the Standard and Poor’s 500 index during the period between 1982 and 2000 shows that companies that laid off or downsized made fewer profits than those that did not. Suffice it as a sample button followed by many others on all the prestigious stock indices.

If that’s the way things are, why are layoffs cited as part of the solution and not addressed rather as an undesirable, painful and, in both cases, avoidable measure? An article entitled “Layoffs, Top Executive Pay and Firm Performance” de la American Economic Review. It points out that statistics teach us that there is a positive correlation between announcing layoffs in a company and that the following year the CEO of that company improves his salary and his prospects for future increases.

In post-Covid Spain, all of us involved should do better. The common good deserves an innovative effort.

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