BY THOMAS K. GROSE
In the late 1980s into the early ’90s, Americans heard a new word to
explain why growing legions of them were losing their jobs: “downsizing.”
As opposed to old-fashioned layoffs, downsizing’s rationale, we were
told, was to transform bloated corporations across the business spectrum
into lean, mean, fightin’ machines, ready to take on global competitors.
Moreover, downsizing had a technical aspect: A growing reliance on innovations
apparently meant that companies needed fewer people to operate efficiently.
And it also seemed that, unlike past rounds of layoffs, downsizing was
aimed particularly at well-paid, highly educated, white-collar workers—like
engineers. Now, however, a recently published book argues that most
of the widely held beliefs about downsizing are wrong. Yes, technology
and globalization certainly played a role in what we’ve come to call
downsizing, but the exercise did not make corporate America any smaller
or more productive.
Downsizing in America: Reality, Causes, and Consequences (Russell
Sage Foundation; 321 pp.) is the first comprehensive study of the origins
of downsizing. Written by New York University economists William J.
Baumol and Edward N. Wolf, with Princeton economist Alan S. Blinder,
the book is a result of their crunching data from a wide variety of
government, business, and academic sources, including a previously untapped
and deep well of industrial data, the U.S. Census Bureau’s Enterprise
Statistics. They also plowed through nearly 2,000 articles on downsizing
culled from the Wall Street Journal and the New York Times
from the years 1993-97. Their efforts produced a book that dispels many
more beliefs than it upholds.
First of all, downsizing has not been an economywide phenomenon. It’s
occurred primarily within the manufacturing sector, which employs only
15 percent of America’s workforce. Indeed, the authors found, within
retailing, wholesale trade and other service industries, there’s been
job creation, or upsizing, and in other sectors the trend has been mixed.
And within manufacturing, downsizing is not something new, either. Many—though
not all—U.S. manufacturing industries have been dancing to the steady
drumbeat of downsizing since 1967.
And what’s the main cause? Basically it’s this: Downsizing occurs in
shrinking industries, which are contracting because of a lack of demand
for their products. Moreover, in growing industries, like retailing,
upsizing is the norm. That’s a conclusion they admit is “embarrassingly
simple,” yet it’s not one they had anticipated. Still, it’s a finding
they deem “strong” and “statistically significant.”
But if a lack of demand for an industry’s product is the main reason
in the short term for its companies to cut payrolls, it’s not the only
determinant. Technology plays a role, too, in the long term, because
in dwindling industries it tends to make smaller firms more efficient.
Market forces push companies to operate efficiently, which means having
an optimally sized workforce, and “technology determines what that efficient
size is, and long-run downsizing occurs when technical change requires
a reduction in the size of the labor force.”
But Downsizing notes that technology can also force some companies
to grow. Innovations tend to require larger firms to cut their workforces,
while requiring smaller firms to increase theirs. That’s a phenomenon
economists call a regression toward the mean. And, within declining
industries, the net result is fewer employees in the long run. There
was also evidence that manufacturing industries facing foreign competition
are pushed to downsize. And, the book says, there’s a technological
edge to that aspect, as well. “Increased globalization is fundamentally
rooted in technological advance: Reduced transportation costs, faster
telecommunications, and the like are among the primary drivers of increased
In the retailing and service sectors, growth has resulted in upsizing.
And those retailing and service industries that face import competition
upsize the most. Interestingly, the book says, industries in those sectors
that have lower profitability are also pushed to increase hiring. Technological
improvements didn’t have any noticeable effect on upsizing in those
Within manufacturing, however, downsizing is really a misnomer for
much of what’s occurred. What’s actually happened, the authors say,
is restructuring, or churning. That means that many supposedly downsizing
companies weren’t really reducing bloated workforces, but merely reshaping
them. Of 133 companies scrutinized by the authors that had announced
major downsizings during the period of 1993-97, 55 percent were no smaller
in 1998 than they were in 1990, and the majority actually increased
their labor forces by more than 10 percent. So much for trimming down
to fightin’ shape.
The book offers several rationales for this finding. Some companies
downsize as a short-term fix to a cash-flow problem. Some wrongly assume
cutting staff will make them more efficient, then have to correct their
mistake. And some, because of new technologies, are exchanging unskilled
workers for those “better prepared to deal with the requirements of
new technology.” Technology may require changing the composition of
a workforce, the book says. But it rejects the notion that productivity
improvements wrought by technology lead to increasing joblessness. Jobs
are lost to technology, yes. But many more jobs are created as a result.
Since 1879, they note, U.S. productivity has risen more than elevenfold,
yet there has been no long-term upward trend in unemployment.
But downsizing does not bring about increased productivity, the authors
determined, despite industry’s claims to the contrary. (Indeed, as noted
above, some companies realized they became less productive after they
shed employees—perhaps in part because the job cuts damaged the morale
and increased the skittishness of the remaining workers.) What companies
do get from downsizing is an increase in profits, mainly stemming from
the cutting of wages and other employee compensation.
Additionally, downsizing depresses worker remuneration, so downsizing
firms do not get more output per labor hour, but do get more output
per labor dollar. They pay less for the same amount of work, and that
makes it an effective way to hold down wages. “That is the dirty little
secret of downsizing,” they claim. And forget about unions acting as
a buffer to pink slips; they act more like a magnet. Unionized firms
are more likely to trim workers, perhaps because they tend to be higher
paid and, ultimately, downsizing is about cutting employee compensation.
It’s possible that this new hard-headed attitude of manufacturers toward
wages was dictated by efforts to please results-oriented institutional
investors. Yet, despite the jump in profits enjoyed by downsizing firms,
those companies are not rewarded by Wall Street. In fact, the usual
result is a slumping share price. Why? Perhaps, the book suggests, investors
view massive job cuts as an omen of “trouble ahead.”
As for downsizing focusing on white-collar workers—didn’t happen. While
it’s true, the authors note, that “older, more-educated, white-collar
workers have experienced more increases in joblessness . . . less-skilled
workers are still bearing the brunt of job loss.” In fact, the percentage
of managers in the workforce increases in downsized companies. Moreover,
better educated workers are much more likely to find new jobs than those
with only high school diplomas. And men and white Americans get re-employed
more easily than do women and black Americans. Low-skilled American
workers may eventually get back some lost jobs as technologies become
more user-friendly and require a less skilled workforce. Then again,
they note, as skilled jobs morph into unskilled ones, they often travel
offshore to low-wage, underdeveloped countries. Then again, even simpler-to-use
machines have complex workings that require specialists to keep them
running. Of course, those specialists needn’t be Americans, either.
The cycle continues.
The book also disputes the hoary notion that downsizing has transformed
a huge segment of well-paid industrial workers into low-paid burger
flippers. The authors did uncover evidence that workers changed occupations
and industry more often between 1981 and 1992 than during 1969 to 1980,
and that more men than women did the changing. And it’s true that most
job-changers suffered a loss in earnings. But things have actually improved
over time. Workers who changed occupations between 1972 and ’74 suffered
an average earnings loss of 13 percent; those who switched jobs between
1990 and ’92 had a loss of just 9 percent. Those who moved to a new
industry between 1972 and ’74 had earnings losses of 13 percent; those
who moved to a new industry between 1990 and ’92 had no loss in earnings.
The two main mechanisms that trigger either downsizing or churn aren’t
likely to disappear. “Consequently, downsizing can be expected to recur
repeatedly in the future,” though only for limited periods, the authors
predict. Still, they caution against enacting policies designed to limit
or stop downsizing because it’s not a long-term threat to employment.
Better, they write, to make more effective the familiar solutions designed
to give fired workers relief: retraining programs, job counseling and
placement services, and income support for workers in transition.
They further argue against Luddite policy efforts to protect jobs from
innovation, even though technology can lead to long-term downsizing
in shrinking industries. They note that after India gained independence,
the government banned computers in the insurance industry to protect
the jobs of clerks using pen and ink. Such protections, they write,
“contributed little, if anything, to the economy’s total employment,
but…go a long way toward explaining the country’s continuing and spectacular