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Examining the Incidence of Downsizing and Its Effect on Establishment Performance

  • Peter Cappelli
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    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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    File URL: http://www.nber.org/papers/w7742.pdf
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    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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    1. Lazear, Edward P, 1990. "Job Security Provisions and Employment," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 699-726, August.
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    14. Jaeger, David A & Stevens, Ann Huff, 1999. "Is Job Stability in the United States Falling? Reconciling Trends in the Current Population Survey and Panel Study of Income Dynamics," Journal of Labor Economics, University of Chicago Press, vol. 17(4), pages S1-28, October.
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