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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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    Publication status: published as Neumark, David (ed.) On the Job: Is Long-term Employment A Thing of the Past? New York: Russell Sage, 2000.
    Handle: RePEc:nbr:nberwo:7742

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    Cited by:
    1. 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.
    2. 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.
    3. Peter Cappelli & David Neumark, 2001. "External Job Churning and Internal Job Flexibility," NBER Working Papers 8111, National Bureau of Economic Research, Inc.
    4. Mora Espejo María Consuelo, 2014. "Declive organizativo, fracaso y reestructuración organizacional en empresas colombianas," Contaduría y Administración:Revista Internacional, Accounting and Management: International Journal, vol. 59(3), pages 235-260, julio-sep.
    5. 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 reduc," 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.
    6. 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).
    7. Bergemann, Annette & Mertens, Antje, 2004. "Job Stability Trends, Layoffs and Transitions to Unemployment - An Empirical Analysis for West Germany," CEPR Discussion Papers 4792, C.E.P.R. Discussion Papers.
    8. 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.
    9. 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.
    10. David Neumark, 2001. "Age Discrimination Legislation in the United States," NBER Working Papers 8152, National Bureau of Economic Research, Inc.
    11. Nancy Bertaux & Hervé Queneau, 2002. "The social economics of job security," Forum for Social Economics, Springer, vol. 32(1), pages 1-19, September.
    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, Institute of Industrial Relations, UC Berkeley qt82j7915n, Institute of Industrial Relations, UC Berkeley.
    13. Gu, Wulong & Gera, Surendra, 2004. "The Effect of Organizational Innovation and Information Technology on Firm Performance," The Canadian Economy in Transition 2004007e, Statistics Canada, Economic Analysis.
    14. repec:iab:iabmit:v:33:i:4:p:594-608 is not listed on IDEAS
    15. 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.
    16. Alexander Popov & Peter Roosenboom, 2012. "Venture capital and patented innovation: evidence from Europe," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 27(71), pages 447-482, 07.
    17. 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.
    18. 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.
    19. 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.
    20. 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, Institute of Industrial Relations, UC Berkeley qt4r16k6j6, Institute of Industrial Relations, UC Berkeley.

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