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Downsizing in America: Reality, Causes, and Consequences (review)

In this comprehensive study of 1980s’ and 1990s’ downsizing, economists Alan Baumol, Alan Blinder, and Edward Wolff pursue the answers to three main research questions. First, they attempt to clarify to what extent firms reduced the size of their work forces. The authors argue that much of what ostensibly appeared as downsizing was, in reality, a “regression toward the mean”: larger firms and firms in shrinking industries downsized and smaller firms and firms in growing industries upsized. For instance, while downsizing occurred in large manufacturing firms, smaller retail and service firms experienced upsizing. Also, they argue that many have conflated downsizing with the “churning” of labor that occurs with the restructuring of a firm. While restructuring firms fire some types of workers, they hire others. Subsequently, the size of their overall work forces do not contract, and may even increase (upsize) over time. The second research question explores the consequences of downsizing. The authors bust some popular managerial myths. They argue that downsizing was not an effective strategy to increase competitiveness, nor did it improve productivity. Downsizing did increase profitability by virtue of reducing the cost of labor and “squeezing” savings in wages into profits. However, these profits did not translate into higher stock prices, as stock prices of downsizing firms tended to fall. Unfortunately, with regard to consequences for workers, rather than busting myths, the findings reinforce the reality of what many of the downsized already know: downsizing, restructuring, and churning all added up to increased turbulence in the labor market. Workers changed jobs and industries substantially more often than in the past. The third research question addresses the factors that influenced firms to downsize. Here the authors make their most important contribution to the literature, as studies of the causes of job displacement are lacking. To examine these influences the authors test six interrelated hypotheses: