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Examining the Incidence of Downsizing and Its Effect on Establishment Performance

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  • Peter Cappelli
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    Abstract

    The interest in examining job security and job stability has been driven in part by the phenomenon of downsizing. The distinctiveness of downsizing, as opposed to more traditional layoffs, is that the job cuts do not necessarily appear to be driven by shortfalls in demand but instead appear to be driven by the search for operating efficiencies. Despite the interest in downsizing, there has been essentially no serious investigation into its causes. I distinguish downsizing from job cuts associated with shortfalls in demand and find that employment and management practices over which employers have control, such as severance pay and profit sharing, are important predictors of subsequent downsizing and more general job losses. Surprisingly, excess operating capacity is not necessarily related to more general job losses at the establishment level. I also examine the relationship between both job losses associated with shortfalls in demand and downsizing and subsequent financial performance. The results suggest, among other things, that downsizing reduces labor costs per employee but also sales per employee. Job cuts associated with excess capacity appear to be somewhat more successful at improving sales per employee than is downsizing.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7742.

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    Date of creation: Jun 2000
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    Handle: RePEc:nbr:nberwo:7742

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    Cited by:
    1. Bassanini, Andrea & Nunziata, Luca & Venn, Danielle, 2008. "Job Protection Legislation and Productivity Growth in OECD Countries," IZA Discussion Papers 3555, Institute for the Study of Labor (IZA).
    2. Hyo-Sook Kim, 2009. "Examining the Role of Informational Justice in the Wake of Downsizing from an Organizational Relationship Management Perspective," Journal of Business Ethics, Springer, vol. 88(2), pages 297-312, August.
    3. Peter Cappelli & David Neumark, 2001. "External Job Churning and Internal Job Flexibility," NBER Working Papers 8111, National Bureau of Economic Research, Inc.
    4. Nancy Bertaux & Hervé Queneau, 2002. "The social economics of job security," Forum for Social Economics, Springer, vol. 32(1), pages 1-19, September.
    5. Bergemann, Annette & Mertens, Antje, 2004. "Job Stability Trends, Layoffs, and Transitions to Unemployment: An Empirical Analysis for West Germany," IZA Discussion Papers 1368, Institute for the Study of Labor (IZA).
    6. Pierre, Gaelle & Scarpetta, Stefano, 2004. "Employment regulations through the eyes of employers - do they matter and how do firms respond to them?," Policy Research Working Paper Series 3463, The World Bank.
    7. Beckmann, Michael, 2000. "Unternehmenspolitik, Managerkontrolle und Personalabbau in Deutschland : theoretische Ansätze und empirische Analyse mit Daten des IAB-Betriebspanels (Corporate policy, manager control and staff redu," Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 33(4), pages 594-608.
    8. Mirko Cardinale & Mike Orszag, 2005. "Severance Pay and Corporate Finance: Empirical Evidence from a Panel of Austrian and Italian Firms," Empirica, Springer, vol. 32(3), pages 309-343, 09.
    9. repec:iab:iabmit:v:33:i:4:p:594-608 is not listed on IDEAS
    10. Yılmaz Kılıçaslan & Erol Taymaz, 2008. "Labor market institutions and industrial performance: an evolutionary study," Journal of Evolutionary Economics, Springer, vol. 18(3), pages 477-492, August.
    11. David Neumark, 2001. "Age Discrimination Legislation in the United States," NBER Working Papers 8152, National Bureau of Economic Research, Inc.
    12. Fligstein, Neil & Shin, Taek-Jin, 2005. "Shareholder Value and Changes in American Industries, 1984-2000," Institute for Research on Labor and Employment, Working Paper Series qt82j7915n, Institute of Industrial Relations, UC Berkeley.
    13. Scarpetta, Stefano & Tressel, Thierry, 2004. "Boosting productivity via innovation and adoption of new technologies : any role for labor market institutions?," Social Protection Discussion Papers 29144, The World Bank.
    14. Kevin F. Hallock, 2009. "Job Loss and the Fraying of the Implicit Employment Contract," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 69-93, Fall.
    15. Fligstein, Neil & Shin, Taek-Jin, 2007. "Shareholder Value and the Transformation of American Industries, 1984-2001," Institute for Research on Labor and Employment, Working Paper Series qt4r16k6j6, Institute of Industrial Relations, UC Berkeley.
    16. Vanessa V Tinsley, 2003. "Firms and Layoffs: The Impact of Unionization on Involuntary Job Loss," Working Papers 03-09, Center for Economic Studies, U.S. Census Bureau.
    17. Dong, Xiao-yuan & Xu, Lixin Colin, 2009. "Labor restructuring in China: Toward a functioning labor market," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 287-305, June.

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