Layoffs aren't the answer

Corporate America is trying to downsize itself back to health. But mass job cuts are just going to make the recession worse.

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By Paul R. La Monica, CNNMoney.com editor at large

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What is hurting you the most?
  • Housing meltdown and foreclosures
  • Job cuts and unemployment
  • Cutbacks in government services

NEW YORK (CNNMoney.com) -- Another day, another job cut announcement by a major company.

Corning (GLW, Fortune 500) joined the pink-slip parade Tuesday, saying that it would cut 3,500 jobs. The news follows a brutal Monday, where companies such as Home Depot (HD, Fortune 500), Caterpilliar (CAT, Fortune 500), Sprint Nextel (S, Fortune 500) and Pfizer (PFE, Fortune 500) combined to announce more than 70,000 job cuts.

The reason that companies are rushing to reduce their headcount is obvious. Businesses are faced with sagging demand for their products and services in the wake of this global recession.

That's causing sales, earnings and stock prices to dip. So one way to try and preserve profits is to lower costs - and payroll is usually one of the first places a company looks at to slash expenses.

But are companies going overboard? So far this month, CNNMoney.com has tracked more than 50 major companies that have cut a total of over 210,000 jobs.

Are mass layoffs really the best way to try and cope with this deepening downturn?

I think some companies are taking the easy way out. Layoffs are a short-sighted fix - a way for panicky CEOs to justify their big salaries and bonuses (they're making the tough decisions about how many people to get rid of, after all!) and to satisfy investors clamoring for higher profit margins.

However, adding to the rising number of people looking for work could actually do more harm than good. It's not as if people being laid off will be easily able to find a new job right now.

That means consumers are likely to spend even less. There could be an increase in foreclosures and credit card delinquencies, which will further hurt consumers. All that adds up to continued weak demand...and more problems for the companies trying to cut their way back to health.

David Resler, chief economist with Nomura Securities International Inc. in New York said he thinks that many companies are making the right call to downsize given the "inadequate demand" they face. But he concedes that mass layoffs are only going to prolong the recession.

"The growing number of layoffs will make the downturn worse. It's a bit of a self-fulfilling prophecy right now and it's not likely to end real soon," he said.

Unintended consequences

There are other many problems that come about as a result of big job cuts that companies may be overlooking in their rush to cut costs. For one, layoffs actually can be expensive in the short-term even though they may lead to longer-term cost savings.

Corning said Tuesday it would incur a charge of between $115 million and $165 million in the first quarter. Sprint, which announced 8,000 job cuts Monday, said it will recognize a charge of at least $300 million in the first quarter related to severance costs.

And Caterpillar, which announced 20,000 job cuts Monday, said it would take a $500 million charge this year due to "redundancy costs," with most of that coming in the first quarter.

Then there's the issue of productivity. Senior executives that make the job-cut decisions might like to think that fear is a great motivator and that after a major layoff, the remaining workers will work harder in order to prove their worth and avoid the next swing of the ax. But how often does that happen?

I've worked at publications that have had to lay off lots of people. And every time it's happened, morale dips...and so does productivity. Simply put, it's counterproductive. No one wins when people spend more time worrying about whether or not they're going to be the next to go than they do actually working. And if a company is not productive, customers will eventually notice.

"There are instances where you see staffing get cut to levels where consumer satisfaction deteriorates and you could start losing business," said Robert Korajczyk, professor of finance at the Kellogg School of Management at Northwestern University.

Finally, if businesses keep reducing staff and try and do more with less, they risk not being able to quickly benefit from when there is an eventual economic recovery - whenever that may be.

If companies cut too deeply, it will be that much tougher to meet demand once it actually bounces back.

"Every recession gives way to the next expansion, despite the myopia that grips markets. Companies have to be in a position to respond. They have to balance between what's good for the here and now and managing strategically for the future," said Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida in Orlando.

So instead of resorting to large job cuts, companies might be better off trying to maintain the loyalty of existing employees.

Robert Maguire, the head of human capital services at CBIZ (CBIZ), a professional services company focusing on benefits, payroll and human resources, said that hiring freezes as well as salary cuts for some of the highest-paid executives, often can be better ways for companies to manage through a downturn.

Of course, some companies probably hired too many people during the last economic boom, and they are now trying to make amends for that.

But slashing their payrolls when the economy is arguably at its weakest point during this recession is not the best way to set themselves up for better times ahead.

"Companies don't know how long this downturn is going to last. So it's rational to start cutting jobs. But certainly, sooner or later there is the risk of eliminating too much and taking away what you need for your business to remain viable," said Oscar Gonzalez, an economist with John Hancock Financial Services in Boston.  To top of page

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