Question

During a recession, couldn’t firms reduce their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages? Why did few firms use this approach?

Answer 1

• During recession, the companies try to cut labour cost and improve the bottom line.
• One of the methods of cost cutting followed by the businesses is lay off.
• But lay off during recession comes with its own challenges and consequenses.
• Layoffs affect earnings and employment prospects of the displaced workers which in turn results in downfall of economy of the country.
• Alternative methods for cost cutting can be introduced by the companies and businesses.
• These methods include:

1. Reduction of contribution to retirement and health care plans of employees and workers.
2. Unpaid vacations.
3. Salary freezes or salary cut.
4. Mandatory holiday shutdowns, etc

• It is possible for the companies to cut labour cost during recession by laying off fewer workers.
• Now a days companies are introducing alternative methods to cut cost rather than laying off the workers.
• This is due to following disadvantages of laying off during recession:

1. Due to layoff, economy suffers which in the result in downfall of the company or businesses.
2. Layoff may create a feeling of distrust and low morale among the employees and workers which remain at the organization.
3. The company may face difficulty in recruitment of emoloyees and workers as there will be the fear of job security among them.
4. Recruitment of more emoloyees and workers after layoff will cause company huge cost.
5. Employees who are laid off may cite claims of discrimination or harassment against the employers.
6. During layoff, the companies loses its skilles workers and emoloyees and it will be difficult for the companies to replace those talented and skilled employees.

• Thus, few firms use this approach during the phase of recession.