Which Companies Resort to Layoffs During Tough Times?

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The economic pressures brought on by the COVID-19 pandemic have required many businesses to reduce expenses. While employee layoffs can be an effective cost cutting measure, they also threaten the remaining employees’ morale and undermine an organization’s social structure. New research (Bentley et al., 2021) examines the factors that predict whether a company will resort to layoffs as a cost cutting measure. 

The researchers used a sample of 1,364 US retail banks with quarterly observations from the first quarter of 2019 through the fourth quarter of 2020. They gathered layoff data from multiple sources—financial reports, company announcements, and news reports. Additionally, the researchers examined state Worker Adjustment and Retraining Notifications (WARN). The WARN act requires firms with 100 or more employees to file notifications with state labor departments when conducting layoffs that exceed a threshold (typically 50 employees). 


Results showed that financial pressure significantly predicted increases in both layoffs and workforce reductions (i.e. the net loss of employees). However, results also indicated that the relationship between financial pressure and layoffs was weaker as companies invested more financial capital in things like employee training pre-pandemic. Further, this weakening effect was more pronounced when companies also invested in pre-pandemic physical capital (e.g., branch locations, technology). Finally, supplementary results found that banks with the highest levels of pre-pandemic human capital investments made cuts to expenses in other areas of the business outside of employee layoffs when faced with pandemic financial pressures. 


Results from this study show that firms that develop human and physical capital during normal times will be more inclined to protect employee job security in the face of financial pressures. This information may be help job seekers identify organizations that are likely to provide increased job security during difficult times. However, this recommendation should be taken with a grain of salt, as the pandemic created a unique context to examine how organizations respond to extreme financial pressure. 


Bentley, F. S., Kehoe, R. R., & Chung, H. (2021). Investing for keeps: Firms’ prepandemic investments in human capital decreased workforce reductions associated with COVID-19 financial pressures. Journal of Applied Psychology, 106(12), 1785-1804.