Downsizing in America: Reality, Causes, and Consequences

By Alan S. BlinderJulian N. MayWilliam J. Baumol, et al.

In the 1980s and early 1990s, a substantial number of U.S. companies announced major restructuring and downsizing. But we don't know exactly what changes in the U.S. and global economy triggered this phenomenon. Little research has been done on the underlying causes of downsizing. Did companies actually reduce the size of their workforces, or did they simply change the composition of their workforces by firing some kinds of workers and hiring others? Downsizing in America, one of the most comprehensive analyses of the subject to date, confronts all these questions, exploring three main issues: the extent to which firms actually downsized, the factors that triggered changes in firm size, and the consequences of downsizing. The authors show that much of the conventional wisdom regarding the spate of downsizing in the 1980s and 1990s is inaccurate. Nearly half of the large firms that announced major layoffs subsequently increased their workforce by more than 10 percent within two or three years. The only arena in which downsizing predominated appears to be the manufacturing sector-less than 20 percent of the U.S. workforce. Downsizing in America offers a range of compelling hypotheses to account for adoption of downsizing as an accepted business practice. In the short run, many companies experiencing difficulties due to decreased sales, cash flow problems, or declining securities prices reduced their workforces temporarily, expanding them again when business conditions improved. The most significant trigger leading to long-term downsizing was the rapid change in technology. Companies rid themselves of their least skilled workers and subsequently hired employees who were better prepared to work with new technology, which in some sectors reduced the size of firm at which production is most efficient. Baumol, Blinder, and Wolff also reveal what they call the dirty little secret of downsizing: it is profitable in part because it holds down wages. Downsizing in America shows that reducing employee rolls increased profits, since downsizing firms spent less money on wages relative to output, but it did not increase productivity. Nor did unions impede downsizing. The authors show that unionized industries were actually more likely to downsize in order to eliminate expensive union labor. In sum, downsizing transferred income from labor to capital-from workers to owners

• Format: Hardcover
• Language: English
• ISBN: 0871540940
• ISBN13: 9780871540942
• Release Date: June 2003
• Publisher: Russell Sage Foundation
• Length: 331 Pages
• Weight: 1.45 lbs.
• Dimensions: 1.2" x 6.3" x 9.2"

Customer Reviews

Corporate downsizing: public perception versus reality

Headlines in the last decade of the twentieth century contained a steady drumbeat of corporate downsizing announcements. Now three professors of economics have used money from the Russell Sage Foundation to examine the record to see what actually happened to American firms during those stressful years. They wanted to know whether public perceptions matched reality.The limited funds placed significant constraints on the resources available to the researchers. The value of their work depends heavily on their skill and judgement in using publicly available statistics and discrete private data bases to reveal more than at first sight evident. The result is a model of econometric technique. The first conclusion is that newspaper media tended to favor the dramatic figures from large, well-known manufacturers. Manufacturing in America has been in long-term decline since 1967 and manufacturers have steadily shed jobs. So far, perception matches reality. However, agriculture and manufacturing only provide employment for 15% of the population, so this segment is not a good proxy for the entire economy.What happened in the Service Sector that employed the other 85% of the population? Unfortunately, we can only see gross trends, because the government doesn't collect steady, detailed statistics on this segment. The researchers were forced to use some indirect techniques to tease out meaning from what was available."Downsizing", it turns out, is corporate-speak for upsizing. Firms laid off one set of workers - disproportionately less-educated, older, female or parents of young children - and hired on another set, by implication younger, male and single. Was the resulting workforce more productive? No, there was no change in employee productivity. Moreover, non-managerial employees bore the brunt of the layoffs, so that claims to be ridding the company of "fat" actually increased the management-to-staff ratio.Did investors reward companies for their action? Perception says that downsizing is followed by an increase in the stock price. The reality is that stock prices remain steady or decline after downsizing announcements. So what were the benefits of downsizing? The authors come to a surprising, but authoritative conclusion. Downsizing announcements force down staff wages so that the firm retains more profit. Simple really, isn't it?"Downsizing in America" contains numerous graphs, tables, and economic formulae. Professors Baumol, Blinder and Wolff have spent the Sage Foundation funds wisely to "foster the development and dissemination of knowledge about the economy's political, social, and economic problems."