Wednesday, April 16, 2008

The Hidden Costs of Layoffs

A new study published in the Academy of Management Journal highlights some hidden costs associated with layoffs. Perhaps not a surprise, but downsizing is associated with increased rates of retained employees leaving the company, according to the study's authors, Charlie O. Trevor and Anthony J. Nyberg of the University of Wisconsin-Madison.

Highlight from this press release about the article
Perhaps the most striking finding in this study of quitting rates in some 200 companies was the considerable exodus that even a small downsizing could set off. For example, companies that laid off a mere 0.5% of their workforce sustained, on average, a turnover rate of 13%, a rate that was 2.6 percentage points higher than the average turnover rate of non-downsizing firms. In other words, an extra 2.6% of the workforce left of their own accord, more than five times more workers than were laid off.
Although the release doesn't mention it, who do you think are the employees who are most likely to leave after a layoff? Probably the higher quality ones who have better job prospects, leaving companies potentially understaffed with lower average employee quality.


  1. As you say, not a surprise. I seem to recall some research in labor economics back in the early 1990s that pointed to similar results; will check and see if I can find it.

  2. Well, having spent nearly 2 hours on this project, I haven't found any of the things I thought were out may just not be web-searchable.

  3. But I did just find this:

    Abstract: Involuntary job loss in administrative data is commonly identified by focusing on mass-layoffs or plant closures. However, such events usually do not happen without prior knowledge, which potentially leads to selection in the labor turnover of distressed firms. We find that workers separating from closing plants up to 2 quarters before closure are associated with significantly lower displacement costs and on average significantly higher pre-closure earnings levels as opposed to ultimately displaced workers. Furthermore, our results indicate that displaced workers with high pre-closure earnings experience significantly lower reductions in future employment probabilities. These findings suggest that compositional differences cause estimated displacement costs to differ between early leavers and ultimately displaced workers. Focusing exclusively on the latter group would lead to a serious overestimation of displacement costs.

  4. Nice to see the results back up the theory. It is also interesting how the author pitched the abstract. I thoguth the moral of the paper was "adverse selection"--the bad ones stay and the good ones leave--not "overestimate" of displacement cost.