Layoffs - Pros & Cons

From NPR's Planet Money program comes this segment on layoffs, including an interview with Don Boudreaux, an economist at George Mason University who also blogs at Cafe Hayek.

Mr. Boudreaux explains that layoffs keep business and the economy flexible, which is a good thing. Of course, the two recently unemployed people interviewed don't share his view.

Of interest is the story told by one of the interviewers about the riots in France a couple of years ago. He said the young people rioting consistently told him they had nothing to do because they could not get jobs. French employers, on the other hand, said they would not hire young workers because they have no flexibility if the employee doesn't work out. Young people have no work history to report, and the lack of labor flexibility means they won't be hired.

It's an interesting story, particularly in light of the way this radio segment was presented. Mr. Boudreaux's view was treated as purely academic; a cold, libertarian, unconcerned-with-real-people view. However, the French riots illustrate quite well how dismissing cold theory can lead to "real person" suffering.

Layoffs - Are Business Owners Slaveholders?

I have recently written a couple of times about layoffs. In addition, I had an interesting conversation at SUMP on the same topic.

In that conversation an anonymous commenter expressed a view that one reason capitalism is evil is that employees are mere slaves to their employers. In fact, they are worse than slaves, the argument went, because slave owners paid a lot of money for their property, fed them, housed them, and clothed them. Employers in our capitalist society do none of these things, and when the employee is no longer needed they are let go.

It is an extremely jaded view, and one that predictably fails to see the whole picture.

Employers are as much slaves to their employees as the other way around. They can leave anytime they want - and many do. During the hey day of economic growth and all-time low unemployment rates employers often found themselves fighting each other for the best candidates. Candidates could pick and choose which position to take based on which offer was best for them. When that was the case, no one decried the capitalist system.

Turnover is costly. When employees leave a job for a better offer somewhere else, this results in a real, monetary loss to the original company. Generally a significant amount of time is spent on training employees - making them better at what they do. The time, effort, and productivity spent doing this is lost when they leave.

With a lost employee, the old employer has to find someone new to replace them. And this means time and money spent training the new people. New people are always slower, which results in lost productivity, which can turn profits into losses.

A real world example of this occurred in my company last year. We had an employee in one of our branch offices retire - and then go to work for our competitor. She took 1/3 of that office's business with her. We were unable to replace that business, and so we eventually closed the office completely. What was once a relatively profitable business is now closed because an employee found a better offer elsewhere.

So who really was the slaveholder here?

Layoffs - An Example

A real world example of the layoff discussion I recently wrote about:

My company let an employee go this week. As controller, I had a small part in that decision because I put together a productivity measurement for this particular division and it shows a fairly gloomy outlook for them at their current staffing level. This report measures each employee's productivity, aggregates them, and gives us a cost per unit number.

The cost per unit is too high, which necessitated the staff reduction. We looked at the employees with the worst productivity, factored in other performance issues, and selected someone to let go. This improved our cost per unit by 9%.

2008 was not a kind year to this division, and that's putting it gently. Our product is very labor dependent, so a 9% drop in labor cost per unit is significant. It allows us to keep our prices competitive in our market, as well as begin to improve our overall performance. Without this improvement, it's not unreasonable to expect our owners to contemplate shutting down the entire division. An action which obviously would affect the entire company.

But our former employee is without a job. She is now part of that unemployment rate statistic broadcast consistently in every media source. She likely doesn't know about the data used in the decision making process - nor is she likely to care. All she knows is that she was let go, and who knows what the job outlook is.

These are the dueling concerns every business faces. No one takes joy in staff reductions, but those with the data know that without reducing costs the business may not last as a going concern.