Downsizing deconstructed - 'Examining the Incidence of Downsizing and its Effect on Establishment Performance,' paper by Peter Cappelli of the University of Pennsylvania - Brief Article

Monthly Labor Review, August, 2000

Downsizing differs from traditional layoffs in that the job cuts do not appear to result from drops in demand, but instead seem to be driven by a desire for operating efficiencies, In "Examining the Incidence of Downsizing and its Effect on Establishment Performance," (NBER Working Paper 7742), Peter Cappelli of the University of Pennsylvania examines the causes and consequences of downsizing.

Downsizing is a relatively recent phenomenon--Cappelli notes that the concept of downsizing appeared after the recession of the early 1980s. Surveys by the American Management Association indicated that downsizing increased in the early to mid-1990s, even as the economy was expanding.

For his analysis, Cappelli used data from the Educational Quality of the Workforce National Employer Survey. This survey was conducted by the U.S. Bureau of the Census for the National Center on the Educational Quality of the Workforce in 1994 and 1997.

Cappelli found that unionization and severance pay are associated with more downsizing. He also observed that establishments with a higher percentage of managers downsize more than those with a higher percentage of production workers; this is consistent with an attempt to move toward a flatter structure in the organization. Regarding the consequences of downsizing, Cappelli's analysis shows that downsizing reduces labor cost per employee but it also reduces sales per employee.