Mass layoffs are an old mistake in Big Tech

Far from the cutting edge, these layoffs mark a revival of long-discredited corporate strategies. If the trend continues, history shows that these tech leaders will cripple their companies badly, at best.

Large-scale layoffs began in the 19th century, when large industrial concerns would reduce payrolls to cope with financial meltdowns or simple seasonal fluctuations – although they often laid back workers when good times came.

By the late 1800s, heavy industries such as steel making, eager to reduce their reliance on workers, began installing labor-saving machinery on factory floors. These moves successfully boosted profits and productivity while blunting the power of skilled, organized labor.

But something interesting happened along the way. The middle managers who increasingly controlled these complex organizations recognized that hiring and firing large numbers of workers imposed significant transaction costs on their firms. It wasn’t efficient to try and lure thousands of employees back only a few months or years later.

Increasingly, managers sought to avoid huge fluctuations in the size of their workforce. The hiring and firing decisions became bureaucratic in the hands of the first almighty foreman. New “personnel departments” made their debut, serving to limit turnover and create clear paths for promotion.

As a result, job stability—and lifelong attachment to a single firm—slowly became the norm for white-collar and blue-collar workers alike. The system reached its climax in the 1950s and 1960s, thanks to a strong labor movement and a political commitment to full employment.

And then things fell apart. American businesses, unable to withstand foreign competition, progressively fell behind. By the 1970s, companies began downsizing their workforce in hopes of regaining their competitive edge. These layoffs by industrial giants such as Boeing Co. and General Motors Co. sparked nationwide outrage, especially after white-collar workers and middle managers were targeted.

Heartbreaking stories of lifelong employees being fired just before retirement became commonplace. Still, most executives sold these deductions to shareholders as a necessity. And for the most part, stock markets cheered the mass layoffs as a sign that corporate leaders were taking “necessary steps” to get their enterprises back on track.

But by the late 1980s, dissenting voices began to point to an inconvenient truth: Downsizing was not delivering the expected benefits of lower overhead, less bureaucracy, and greater productivity, despite the human cost. Corporations, far from being lean and mean, just struggled on.

In 1991, a survey of executives who had mass layoffs found that less than a third of respondents reported that profits had grown as expected. Even stock prices, which initially rose on downsizing news, generally fell in subsequent months. Another survey found that more than half of companies saw a drop in productivity after downsizing.

Part of the problem lies with the surviving employees. An academic article published in 1993 stated: “Study after study shows that after downsizing, surviving employees become narrow-minded, self-absorbed and risk-averse” – the opposite result that was desired.

More rigorous studies of corporate profitability confirmed these findings. A study in 1994 found that corporations that downsized experienced a decline in their profitability for several years. A study published in 1997 that examined S&P 500 companies between 1981 and 1992 confirmed that mass layoffs had a negligible effect on profitability. “No evidence of broad-based increases in productivity,” another study concluded, “has been discovered so far among restructured companies.”

Still, downsizing supporters remained swayed, even though they acknowledged that, say, reducing half of your workforce at once might not be the best approach. The idea that pruning payroll could restore a company’s profitability was too tempting to abandon overnight.

Slowly, however, a new consensus began to emerge within management circles, which viewed mass layoffs as a deeply risky strategy, while sometimes necessary – and even too specific. Beneficial in circumstances – was otherwise fraught with risk.

In 2008, for example, a study of the downsizing effects titled “Dumb and Dumber” confirmed that large-scale layoffs cut into the profitability of firms, particularly in industries with low levels of physical capital (factories, for example). for), but at a higher level Investment In human capital, or in workers.

This accurately describes Meta and Twitter. They are not General Motors with massive investments in machine tools, robots and factories. The capital of these tech companies is almost entirely tied up in their employees. Outside of those software engineers and content moderators, they really don’t have much in the way of hard assets.

But none of this has stopped Messrs Musk and Zuckerberg from forging ahead like they possess some Rust Belt concern circa 1981. After Musk cut Twitter’s 7,000-person workforce in half this month, Zuckerberg announced 11,000 layoffs at Meta.

The foolishness of these moves is already evident, as Musk rebuffed some of the shootouts last week. The situation has only worsened since then, with news on Monday that heroine is planning massive layoffs across its appliances and retail divisions.

For those who wish these tech giants would live but not necessarily lead, take heart. A study that looked back more than three decades found that CEOs who adopted a mass layoff strategy were more likely to receive their own pink slips for their bungled efforts. Poetic justice, indeed.

Stephen Mihm, professor of history at the University of Georgia, is co-author of “Crisis Economics: A Crash Course in the Future of Finance.”