Does Employee Downsizing Really Work?

Abstract

Over the past couple of decades, employee downsizing has become a fact of organizational life, not just in the U.S. but, increasingly so, in other countries, with unprecedented levels of downsizing occurring in several countries during the last recession. Seen as being inevitable in an increasingly competitive global marketplace, the high levels of downsizing activity attest to the deep-seated belief among managers that downsizing enhances organizational efficiency and leads to improved financial performance. Critics, on the other hand, argue that benefits are illusory and point out that attendant costs, both visible and invisible, can make downsizing a relatively ineffective tool for creating firm value.

After a brief discussion of the factors that motivate and propel firms to engage in downsizing, we, in this article, examine the findings of extant research to assess whether downsizing does indeed improve organization performance. What we find based on our examination of 55 studies is that the findings are equivocal with very little agreement among researchers on the efficacy of employee downsizing to create organizational value. We explore possible reasons for the same and conclude by providing directions for future research that, we believe, will provide the insights that scholars and managers need to better understand the complex relationship between employee downsizing and firm value.