The Impact of Downsizing on Workers, Communities, and Markets

Introduction: The Scope of Downsizing

What is the impact of downsizing? As the studies reviewed below indicate, layoffs have a number of negative effects not only on workers in different industries, but also on their communities and the market as a whole. Although it has been argued that downsizing can be economically beneficial to companies, the evidence presented here shows that there are two sides to this issue.

Over the past decade, the workplace has altered considerably in terms of job stability. People have either experienced layoffs firsthand or directly known someone else who was impacted by re-engineering, downsizing, outsourcing, or acquisition. For employees adversely affected by these changes — or for those who do not fully understand why these changes are occurring — the effects can be very disturbing and can impact both their personal and professional lives.

Restructuring and Its Effects on Healthcare Workers

A variety of industries have been impacted by layoffs, not only manufacturing. Hospitals, like other companies and nonprofit organizations, have experienced downsizing that has negatively affected healthcare employees with varying degrees of psychological distress and poor health. In a 2002 study, Greenglass, Burke, and Fiksenbaum showed that restructuring and the changes it brings can result in lower job satisfaction and increased job insecurity.

The researchers studied the relationship between the impact of restructuring, job satisfaction, job insecurity, and absenteeism in nurses. The results were consistent with earlier studies indicating that job insecurity can often have harmful consequences for individuals. Job insecurity has frequently been reported to lead to decreased psychological well-being (Dekker & Schaufeli, 1995; Ferrie et al., 1998). In a study of Finnish employees, Kinnunen et al. (2000) reported that job insecurity, which led to negative relationships with colleagues and superiors, was still being observed at least one year after the initial event.

The respondents of the Greenglass study — consisting of 1,363 nurses employed in hospitals undergoing extensive restructuring — first completed a self-report anonymous questionnaire. Results demonstrated that the impact of hospital restructuring had a direct effect on job satisfaction, which in turn had a markedly negative impact on absenteeism and job insecurity. In addition, the study found that the more nurses believed hospital restructuring had lowered the quality of healthcare and had negatively affected working conditions, the less likely they were to experience job satisfaction and the more likely they were to report feelings of job insecurity.

Findings further demonstrated that job satisfaction functioned as an intermediary between the impact of restructuring and job insecurity: lower job satisfaction resulting from greater restructuring impact led to decreased job security. The impact of restructuring also exerted an indirect effect on absenteeism through job satisfaction — the lower the job satisfaction resulting from restructuring, the more likely nurses were to miss work.

These results were consistent with prior studies that linked layoffs with increased job insecurity. Campbell-Jamieson, Worrall, and Cooper (2001), for instance, compared responses from managers in three different business settings: organizations that restructured and downsized in the previous year, firms that restructured without downsizing, and companies that had not restructured at all. Managers in organizations that had downsized reported less job security, lower organizational commitment, and reduced morale. Research has also demonstrated that reorganization can lead to greater emotional turmoil, including feelings of anger, anxiety, cynicism, and resentment (O'Neill & Lenn, 1995). Burke and Nelson (1997) found that this is most likely the result of a variety of negative perceptions throughout the restructuring process, such as the belief that workers were treated unfairly, that the psychological contract was eroded, and that future employment would be insecure.

The findings by Greenglass additionally showed that restructuring impacts job insecurity in both direct and indirect ways. In other words, one effect of downsizing is lower satisfaction with one's job — most probably the result of disillusionment, feelings of being let down by the organization, and uncertainty about future employment. Decreased job satisfaction then leads to lower job security. The researchers do note, however, that these increased feelings of disillusionment and decreased feelings of job satisfaction and job security can be reduced if the organization's administration makes efforts to offer support, information sharing, and input into decision-making. To the degree that healthcare workers believe they are valued by the hospital and that the institution cares about them and their opinions, the effects of restructuring can be considerably diminished.

Physical Health Consequences of Downsizing

The impact of downsizing on workers combines both psychological and physical dimensions. Kivimäki et al. (2000) conducted a study to explore the underlying mechanisms between organizational downsizing and deterioration of employee health. They found that negative changes in work are associated with declining support from a spouse and increased prevalence of smoking. Sickness absence rates from all causes were 2.17 times higher after major downsizing than after minor downsizing. Adjustment for changes in work conditions — such as physical demands, job control, and job insecurity — diminished the association between downsizing and sickness absence by 49%. Adjustments for impaired social support or increased smoking did not change the relationship between downsizing and illness-related absence. These conclusions were unaffected by sex or income level.

Kivimäki concluded that exploring potential mediating factors offers new knowledge about the possible causal pathways connecting organizational downsizing and health. Downsizing results in changes in work conditions, social relationships, and health-related behaviors. The notable increase in certified sickness absence was partially explained by simultaneous increases in physical demands and job insecurity, as well as a decline in job control.

Community and Economic Consequences of Layoffs

A reduction in employees leads to a number of negative effects; the closing of an entire plant or business can result in even greater problems. The recent economic history of Cleveland County, North Carolina, has been marked by factory closings, business layoffs, and significant unemployment rates. More than 3,500 workers lost their jobs in this area over a four-year period — and this may even be an underestimate, since it applies only to events involving 50 or more workers at a time. Many smaller firms also laid off workers. Such numbers are particularly significant given that the county's total labor force numbered only around 42,000 workers to begin with.

Layoffs have been devastating to workers and their families. In the best cases, unemployed workers were able to find other work, but this typically involved a temporary loss of income and a reduction in pay. In the worst situations, workers remained unemployed indefinitely — either because they lacked the necessary skills for available jobs or because they considered themselves too old to relocate or return to school.

Economic dislocation also creates problems for the broader community. When unemployment rates rise, there is increased demand for social services at a time when communities are experiencing sharp declines in tax revenue. These declines often result in poorer quality education, a deteriorating infrastructure, and larger welfare rolls, making it more difficult to attract new businesses to the area.

Conclusion

In the future, as downsizing continues, additional studies will have to be conducted to determine the long-range impacts on individuals, their families, communities, and the economy as a whole.

References

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