Examining the Incidence of Downsizing and its Effect on Establishment Performance

43 Pages Posted: 16 Jun 2000 Last revised: 18 Oct 2010

See all articles by Peter Cappelli

Peter Cappelli

University of Pennsylvania Wharton School - Center for Human Resources; National Bureau of Economic Research (NBER); University of Pennsylvania - Management Department

Date Written: June 2000

Abstract

The interest in examining job security and job stability has been driven in part by the phenomenon of downsizing. The distinctiveness of downsizing, as opposed to more traditional layoffs, is that the job cuts do not necessarily appear to be driven by shortfalls in demand but instead appear to be driven by the search for operating efficiencies. Despite the interest in downsizing, there has been essentially no serious investigation into its causes. I distinguish downsizing from job cuts associated with shortfalls in demand and find that employment and management practices over which employers have control, such as severance pay and profit sharing, are important predictors of subsequent downsizing and more general job losses. Surprisingly, excess operating capacity is not necessarily related to more general job losses at the establishment level. I also examine the relationship between both job losses associated with shortfalls in demand and downsizing and subsequent financial performance. The results suggest, among other things, that downsizing reduces labor costs per employee but also sales per employee. Job cuts associated with excess capacity appear to be somewhat more successful at improving sales per employee than is downsizing.

Suggested Citation

Cappelli, Peter, Examining the Incidence of Downsizing and its Effect on Establishment Performance (June 2000). NBER Working Paper No. w7742. Available at SSRN: https://ssrn.com/abstract=233080

Peter Cappelli (Contact Author)

University of Pennsylvania Wharton School - Center for Human Resources ( email )

3733 Spruce Street, Vance Hall
Philadelphia, PA 19104-6358
United States

HOME PAGE: http://www.wharton.upenn.edu/faculty/cappelli.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

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