The Impact Of Managerial Layoffs

A wave of managerial layoffs in recent years has been attributed to the recession having cut a swath beyond the [...]

June 1 1992 by Peter Cappelli


A wave of managerial layoffs in recent years has been attributed to the recession having cut a swath beyond the blue-collar ranks. But the forces driving such layoffs are more fundamental-and more permanent-than any pressures associated with a cyclical downturn.

In fact, it’s clear that for a number of reasons, managers during the mid-1980s were more vulnerable to job displacement than were employees in other occupations. The adoption of new technology by companies, plant closings, the empowerment of rank-and-file workers and restructuring efforts aimed at cutting costs all played a role in the streamlining of management ranks.

Among managers who survive cutbacks, job security declines. But also affected are corporations, which find it difficult to inspire or retain organizational commitment. Insecure managers are also more liable to jump from one organization to another. If corporations respond by declining to make necessary investments in managerial training, ultimately, their domestic and global competitiveness may decline.

EMPLOYMENT TRENDS

Before the 1980s, managerial jobs in the U.S. were relatively insulated from changes in the economy. In return for loyalty and adequate performance, managers at many companies had a job for life. There were advantages to this arrangement for both managers and their organizations. Job security made it possible for managers to develop skills and experience specific to their firms.

On the corporate side, the commitment bred by job security prompted employers to invest substantial amounts in management training. The presumption was that satisfied employees would be much less likely to leave and take their training with them. In the 1960s, managerial unemployment rates were negligible-below one percent. Even when overall unemployment rose to 7 percent, managerial unemployment never rose above one percent.

By the 1980s, however, some changes were apparent. When overall unemployment was 7 percent during the decade, managerial unemployment had grown to 3 percent-an enormous increase compared to the 1960s. In addition, the displacement of managers did not abate after recession early in the 1980s, but actually accelerated through the middle part of the decade. According to a study I recently completed, managers in the 1980s were actually more likely to lose their jobs than were other employees. This marked a dramatic turnaround from prior decades. In fact, the number of displaced managers was 24 percent higher in the second half of the 1980s than in the first half, despite explosive economic expansion in the later period.

Further, estimates from the Bureau of Labor Statistics have suggested that managerial layoffs may not be over. The number of unemployed managers in 1990 was 12 percent higher than in 1989, according to the agency.

THINNING THE RANKS

The reasons for this trend? A full 43 percent of managers in the 1980s lost their jobs because of plant closings. This was far and away the most important cause of management job loss. In fact, proportionately, fewer blue-collar workers lost their jobs from plant closings than did managers.

But over the long term, corporate restructuring efforts have taken the most severe toll on the management ranks. Such efforts frequently “thin” the management ranks while transferring managerial responsibilities elsewhere in the organization.

Some of the change may be associated with the installation by companies of technologies that manage and speed the flow of information within the organization. New technology has eliminated the traditional tasks of middle managers. The number of managers is also dwindling because many companies are flattening their management hierarchies. Efforts to decentralize operations and the adoption of so-called participative management, programs-under which many supervisory functions are passed on to workers-have eliminated layers of management. Overall, nearly 1.6 million managers were displaced during the 1980s.

Of course, restructuring efforts entail costs, particularly to displaced managers themselves. When they lose their jobs, middle managers often have nowhere to go, because there is no market for their skills. Middle management jobs also typically require specific knowledge about an organization, so employers fill vacancies by promotion from within, not by hiring from the outside. Moreover, some outplacement services appear to be less suited to find jobs for managers than for blue-collar workers. When displaced managers found new jobs in the 1980s, they seemed to have taken bigger pay cuts than did displaced nonmanagers.

COSTS FOR EMPLOYERS

But restructuring efforts also have costs for employers. Much downsizing is based on general theories that cannot determine the ideal management size. In the 1970s, conventional wisdom held that a well-run organization should have 12 levels of management, but now experts say the number should be eight or nine. But there is nothing magical about any of these numbers. In fact, there is a risk that firms may cut too far, partly because the costs of a reduction may not be known for some time. For example, although a downsized management may be able to handle a firm’s routine operations, it may find that it no longer has the expertise needed to handle more demanding tasks, such as the introduction of new products. Another potential hazard is that the loss of experienced managers-perhaps through an early retirement program, a common downsizing mechanism-may change a company’s demographic balance and lead it to make less informed, far riskier decisions.

Another cost for corporations may be that because of eroding job security, management positions are gradually losing their appeal. Put another way: Why become a manager if career prospects are poor and the job requires the painstaking development of firm-specific skills that are wasted if one leaves or is released? But perhaps most important, layoffs also reduce commitment to the organization and encourage job hopping among current managers. In turn, firms become reluctant to make investments in managers for fear those investments will be lost. The fact that necessary training and other investments may no longer be cost-effective is an important concern for national competitiveness.

The benefits of eliminating unnecessary management jobs-including cost cutting-are obvious. But employers must understand that there’s a flip side to the coin. We are still groping in the dark as to what comprises sensible restructuring. Yet personnel cuts by some companies have seemed to release a wave of layoff decisions at other companies. When IBM decided to cut some of its managers last fall, for example, other companies followed suit.

Firms now face a dilemma. They are asking managers to do the same work with fewer people, but they are also depriving these same managers of job security. For their own good, firms will eventually have to create more job security for at least some of their managers. One alternative might be for companies to adopt aspects of the so-called professional firm model. Under the approach, managers with important, firm-specific skills would receive significant job security (partners), while layoffs would take a heavier toll among managers with more general skills.

Job security for managers has continued to erode: The unemployment rate for managers soared 55 percent last year, while overall unemployment climbed just 13 percent. Unless corporate America moves to redress this imbalance, corporate commitment and morale will decline, and productivity may follow.


Peter Cappelli is Associate Professor of Management at the Wharton School of the University of Pennsylvania and co-director of the Wharton Center for Human Resources. He is also co-director of the U.S. Department of Education’s National Center on the Educational Quality of the Workforce.