Effect of Downsizing on Manufacturing Industries Term Paper

  • Length: 20 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #78581859

Excerpt from Term Paper :

downsizing on Manufacturing Industries

The amount of information on the effects of down sizing on manufacturing was not plentiful, however one main point that flows through all of the articles is that even though down sizing may be done to help a company it can end up hurting them in the long run. In the paragraphs to follow we look at the effects that downsizing has on people and companies as well as look at whether or not downsizing is truly the answer.

Parker (2003)Reports that in 2003 the expected job losses among the manufacturing industries in Great Britain would create the effects of rising input costs and oil price increase on the job cuts; Downturn of the purchasing managers' index for manufacturing; Decrease in the rate of manufacturer's orders. So even though these cuts may be necessary he pointed out that it would have an overall negative effect.

The Midwest may be the focus of manufacturing layoffs and financial woes (Link, 2005), but according to this survey, people who live in the area of the country that includes Cleveland and Detroit in the low- to moderate-income lax bracket are using less of their income to pay for housing than other areas of the country. The study, dubbed the Housing Landscape for America's working Families 2005, revealed that from 1997 to 2003 the number of America's working class who spend more than half of their income on housing leaped from 2.4 million to 4.2 million. The study also revealed that immigrant families are 75% more likely to use more of their income to pay for housing than American-born citizens. Across the country there are 14 million people that spend too much of their income 10 pay for housing. About 35% of that group is low- to moderate-income families.

In 2003, the critical housing need for the Midwest totaled 8.7% of residents while the West Coast had a need among I6.89 (of its residents. The South followed the Midwest for a lower critical housing need with 9.3% while the Northeast trailed California with a need among 14.2% of its residents (Link, 2005).

(Palley, 1999) Reported that given the dismal economic performance that marked the period from 1990 to 1995, when downsizing was widespread, inequality widened, and real wages fell, the subsequent U-turn in performance has been completely unexpected. Moreover, it has been cause for further surprise that the economy has continued to prosper despite the East Asian financial crisis, which destabilized global financial markets, undermined U.S. exports, and unleashed a surge in U.S. imports.

A second source of uncertainty (Palley, 1999) concerns the sustainability of the growth of personal consumption spending, which had been the principal engine of economic expansion in the past two years. In 1997, personal consumption expenditure contributed 59% of gross domestic product (GDP) growth, and in 1998 it contributed 85%. Meanwhile, in 1997 and 1998 nominal personal consumption expenditures grew 5.3% and 5.7%, respectively, while nominal disposable income grew only 4.7% and 4.0%. From the Federal Reserve's perspective, this pattern is not sustainable since consumption is growing faster than potential output, which implies that the economy will eventually hit an inflationary wall. An alternative interpretation is that such growth is not sustainable because households must inevitably run short of financial wherewithal, and when this happens, an economic decline will ensue. According to this view, recession rather than inflation is the danger.

A last scenario concerns the possibility of a full-scale crash or economic depression. Such an outcome is the least likely of the three scenarios, but it is still more likely than it used to be. In the 1960s and 1970s, the possibility of an economic depression was truly far removed. However, in the 1990s such a notion has surfaced as plausible, even if unlikely. Recent events in the global economy have added further credibility to this possibility.

One reason a crash has become more likely is that many of the factors precipitating a hard landing are already in place, which means that many of them could be realized simultaneously. Indeed, many of these factors are linked in trip-wire fashion so that if one occurs, it triggers another. Thus a Federal Reserve-induced increase in interest rates could trigger a stock market crash, and this could then trigger an end to the spending boom. It could also trigger renewal of global financial instability.

Similarly, a renewal of global financial instability could become the event that bursts the stock market bubble. Alternatively, a realization that the existing U.S. current-account trajectory is unsustainable could trigger a foreign exchange crisis that would renew global financial market instability, trigger a stock market crash, or evoke a Federal Reserve rate hike to protect the exchange rate and guard against imported inflation.

Finally, if the economic expansion begins to flag of old age, overoptimistic projections of corporate profitability could pop, triggering a stock market crash. Also, a flagging economy could renew global financial turmoil by ending the U.S. economy's role as buyer of last resort, thereby undermining the rest of the world's economic recovery, which rests significantly on export-led growth.

However, it is not just this interconnectedness of negative factors that lies behind the increased plausibility of a crash. A second and more important factor concerns changes in the structure of the domestic and global economy that have diminished the presence of "automatic stabilizers" and replaced them with "automatic destabilizers."These destabilizers work in a pro-cyclical fashion. On the cyclical upswing they make for stronger and longer expansions, but on the downswing they make for deeper and more sustained contractions.

One important change concerns patterns of employment and remuneration. In earlier business cycles, labor hoarding was a common practice -- firms held on to workers through downturns in order to retain their skills and avoid future hiring costs. However, the changed pattern of the employment relationship means that firms now hire and fire much more freely, making labor incomes more pro-cyclical. It is also the case, especially in manufacturing, that overtime has become more important as firms have sought to save on employment costs by extending hours rather than hiring new personnel. Wage income is therefore more vulnerable to downturns since hours can quickly be cut back in a downturn. Finally, casual evidence suggests that there may have been an increase in the use of incentive pay, with greater reliance on stock options and profit-related bonuses. In a downturn these forms of pay are likely to fall off rapidly, contributing to a larger decline in household income and spending. In sum, the above labor market developments all make wage income more procyclical, thereby increasing the pro-cyclicality of demand (Palley, 1999).

Another development concerns the general flexibility of wages. In the period from 1950 to 1980, recessions were characterized by a decline in the rate of increase in nominal wages. However, the important point is that wages still rose in recession. The recessions of 1981-1982 and 1990-1991 suggest that a new pattern may have emerged. Now not only does the rate of wage inflation slow, but nominal wages can fall. This is a very important development when it is considered in conjunction with the new debt-driven business cycle. The ability to repay consumer debt depends on the nominal value of income. In a recession the value of debts remains unchanged, but now wage incomes may show a tendency to fall. This will tend to increase debt burdens and raise the prevalence of bankruptcy, thereby deepening recessions.

Just as developments in labor markets have contributed to the emergence of automatic destabilizers, so have developments in financial markets. Households now have significantly increased access to credit. In particular, households are able to borrow more heavily against their assets, thereby increasing their ratio of debt to income. Home equity loans are the most prominent example. Another is the ability to borrow on margin against stock holdings. These innovations and their spread give the economy a strong pro-cyclical impulse, but they also generate greater financial fragility. Thus, in upswings when asset prices and wages are rising, households borrow more and spend more, thereby lengthening the cycle. However, when the downswing occurs, households are now saddled with greater indebtedness and may also be subject to margin calls. This worsens the downturn and may contribute to even greater stock market corrections (Palley, 1999).

The shift from defined benefit to defined contribution pension plans is another automatic destabilize. First, households are able to borrow against these contributions. Second, these plans may change household consumption and saving behavior since each month they receive statements showing how the value of their pension holdings has increased. Thus, as stock market prices rise, households cut back on saving and increase consumption, while some households borrow against their appreciated 401(k) accounts. However, stock prices are likely to fall in a recession, while the incurred debts will remain unchanged. At that time, households will have larger debts and reduced holdings of liquid assets.

Finally, it is worth noting that prices in the stock market may have been…

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