Employee Downsizing

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One company that suffered greatly was Delta Airlines, which had laid off over 18,000 employees during the early 1990s. Delta Airlines realized in a very short time that it was running short of people for its baggage handling, maintenance and customer service departments. Though Delta succeeded in making some money in the short run, it ended up losing experienced and skilled workers, as a result of which it had to invest heavily in re-hiring many workers. As investors seemed to be flocking to downsizing companies, many companies saw downsizing as a tool for increasing their share value. The above, coupled with the fact that senior executive salaries had increased by over 1000% between 1980 and 1995, even as the layoff percentage reached its maximum during the same period, led to criticism of downsizing. In light of the negative influence that downsizing was having on both the downsized and the surviving employees, some economists advocated the imposition of a downsizing tax (on downsizing organizations) by the government to discourage companies from downsizing. This type of tax already existed in France, where companies downsizing more than 40 workers had to report the same in writing to the labor department.

Also, such companies were liable to pay high severance fees, contribute to an unemployment fund, and submit a plan to the government regarding the retraining program of its displaced employees (for their future employment). The tax burden of such companies increased because they were no longer exempt from various payroll taxes. However, the downsizing tax caused more problems than it solved. As this policy restrained a company from downsizing, it damaged the chances of potential job seekers to get into the company. This tax was mainly responsible for the low rate of job creation and high rates of unemployment in many European countries, including France.

The Second Phase

By the mid-1990s, factors such as increased investor awareness, stronger economies, fall in inflation, increasing national incomes, decrease in level of unemployment, and high profits, reduced the need for downsizing across the globe. However, just as the downsizing trend seemed to be on a decline, it picked up momentum again in the late-1990s, this time spreading to developing countries as well. This change was attributed to factors such as worldwide economic recession, increase in global competition, the slump in the IT industry, dynamic changes in technologies, and increase in the availability of a temporary employee base. Rationalization of the labor force and wage reduction took place at an alarming rate during the late 1990s and early 21st century, with increased strategic alliances and growing popularity of concepts such as lean manufacturing and outsourcing.²

Criticism of downsizing and its ill-effects soon began resurfacing. Many companies suffered from negative effects of downsizing and lost some of their best employees. Other problems such as the uneven distribution of employees (too many employees in a certain division and inadequate employees in another), excess workload on the survivors, resistance to change from the survivors, reduced productivity and fall in quality levels also cropped up. As in the early 1990s, many organizations downsized even though it was not necessary, because it appeared to be the popular thing to do.

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2] In lean manufacturing, organizations aim at cost reduction and minimization of resource consumption. Downsizing became one of the tools that helped in the implementation of lean manufacturing. Operations were outsourced to organizations in developing countries (especially in Asia) where labor costs were less, thus contributing to downsizing in developed countries.

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