Downsizing in America: Reality, Causes, and Consequences

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Summary: Corporate downsizing: public perception versus reality
Review: 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."