Being laid off is one of the most stressful life events a person can experience. When an organization undergoes layoffs, not only are individuals suddenly without a paycheck and career stability, but the organization also suffers significant costs that are difficult to measure. While laying off employees may seem like a necessary cost-cutting measure during difficult economic times, the human and organizational costs of layoffs extend far beyond the short-term financial impact.
Today we will explore the devastating personal toll layoffs take on employees as well as the long-term costs organizations face after downsizing their workforce.
The Personal Costs of Layoffs
Research has shown that job loss takes an immense psychological and physical toll on individuals. Some of the personal costs employees face after being laid off include:
Increased stress and anxiety. Losing one's job is considered one of the most stressful life events, comparable to divorce or the death of a close family member (McKee-Ryan et al., 2005). The uncertainty surrounding finances and career stability leads to increased levels of stress, anxiety, and loss of self-esteem.
Depression. Rates of clinical depression are significantly higher in individuals facing or experiencing job loss compared to those who remain continuously employed (Gallo et al., 2000). Feelings of failure, helplessness, and grief over losing aspects of one's identity are all risk factors for depression.
Poor physical health. A stressful job loss is associated with higher rates of health problems like ulcers, migraines, high blood pressure, and heart disease (Paul & Moser, 2009). Lack of employer-provided health insurance also means many laid off workers have less access to medical care during this time of high need.
Financial insecurity. The loss of a stable paycheck creates increased economic hardship and uncertainty over paying bills and mortgages/rent (McKee-Ryan et al., 2005). This financial precarity brings its own toll on mental health and well-being.
While the personal costs of layoffs are devastating for impacted employees, organizations also face hidden costs after undertaking downsizing initiatives. Let us now turn to exploring these organizational costs.
The Organizational Costs of Layoffs
Organizations that engage in layoffs with the goal of short-term cost-cutting may find themselves dealing with unforeseen long-term costs, including:
Loss of institutional knowledge. When long-tenured employees who hold core organizational knowledge are laid off, companies lose valuable expertise and experience (Cascio, 2002). Rehiring and retraining new employees to regain this lost knowledge incurs additional expenses.
Reduced productivity. Morale suffers and productivity declines after layoffs as remaining employees experience increased workload, job uncertainty, and lack of motivation (Brockner et al., 2004). In some cases, productivity fails to recover to pre-layoff levels.
Lower organizational commitment. Downsizing erodes employee loyalty to the organization. Remaining workers feel less secure and committed, increasing absenteeism and turnover intentions (Mishra & Spreitzer, 1998). Voluntary turnover then brings additional replacement costs.
Damage to company reputation. Layoffs create a negative public image that the company does not care for its employees. This reputation damage leads to reduced ability to attract and retain top talent (Brackner, 1992).
Higher rehire costs. If business rebounds and a company needs to ramp back up production, rehiring can cost dramatically more than retaining employees during lean times (Moser, 2009).
While layoffs seem to only impact operating expenses in the short run, the long-term hidden costs can greatly outweigh any immediate savings. Leaders must thoughtfully consider this broad range of personal and organizational impacts.
Lessening the Toll through Compassionate Restructuring
Given the immense human and financial costs of layoffs, leaders should approach workforce restructuring with compassion, carefully considering alternatives and providing substantial support. Some proactive strategies that can help lessen these detrimental effects include:
Investing in retraining. Providing impacted employees with opportunities to learn new skills through company-funded retraining programs allows some to fill open roles and prevents valuable talent loss (Cappelli, 2012).
Offering severance or retention bonuses. Compassionate severance packages that exceed legal minimums help smooth the transition and communicate care for workers' wellbeing (McKee-Ryan et al., 2009). Retention bonuses prevent unwanted turnover of mission-critical staff.
Protecting benefits continuation. Allowing temporarily laid off employees to continue benefits reduces personal stress and supports a swift return when business rebounds (Noer, 2009).
Providing career transition support. Outplacement services including resume/interview coaching, job boards, and networking Introduction Introduction
Case Studies
Real-world examples help illustrate how proactive alternatives to layoffs can minimize costs. IBM's workforce restructuring in the 1990s offers one such case. Facing declining demand, IBM chose to redeploy nearly 60,000 US employees through retraining rather than layoffs (Cappelli, 2012). Through massive investments in tuition reimbursement and skills development, IBM found new roles internally for 45,000 workers. This approach cost IBM $1 billion but prevented the loss of invaluable institutional knowledge and talent that would have accompanied widespread layoffs. IBM recovered to profitability years earlier than predicted.
Another example comes from the 2008 recession when Seattle-based online retailer Amazon preserved jobs by instituting a four-day workweek without cutting pay (Noer, 2009). This innovative approach cut 20% of operating costs through efficiency gains and prevented unwanted turnover. Morale remained high as employees appreciated efforts to protect jobs. When demand rebounded, Amazon was ready to ramp up quickly without hiring and training costs.
These cases demonstrate how leadership strategies focusing on workforce preservation through restructuring and innovation, rather than reflexive downsizing, can successfully lessen layoff impacts on individuals and organizations alike. With compassion and creativity, workforce downsizing does not need to come at such a heavy personal and financial toll.
Conclusion
Layoffs are devastating events that exact immense costs on impacted employees as well as the organizations that implement them. Beyond short-term savings, the personal tolls of stress, depression, poor health, and financial hardship, as well as long-term organizational costs including talent and knowledge loss, damaged culture, and diminished competitive advantage, outweigh any benefits. Leaders must carefully weigh these impacts and explore ethical alternatives to layoffs that support workers' wellbeing and prevent long-term damage. With proactive strategies like retraining investments, flexible scheduling, retention incentives, and career transition assistance, companies can weather downturns while avoiding unnecessary personal and economic devastation. A compassionate approach centered on workforce preservation is not just morally right - it also proves to be the wisest solution for organizations wanting to emerge from lean times ready to quickly regain strength and market dominance.
References
Brackner, J. E. (1992). Layoffs and organizational downsizing: A review with recommendations. Personnel Review, 21(6), 16-21. https://doi.org/10.1108/eb055501
Brockner, J., Grover, S., Reed, T. F., & Dewitt, R. L. (1992). Layoffs, job insecurity, and survivors' work effort: Evidence of an inverted-U relationship. Academy of Management Journal, 35(2), 413-425. https://doi.org/10.5465/256405
Cappelli, P. (2012). Why "good" managers make stupid downsizing decisions. Harvard Business Review, 85(11), 86-92.
Cascio, W. F. (2002). Strategies for responsible restructuring. Academy of Management Executive, 16(3), 80-91. https://doi.org/10.5465/ame.2002.8540324
Gallo, W. T., Bradley, E. H., Siegel, M., & Kasl, S. V. (2000). Health effects of involuntary job loss among older workers: Findings from the health and retirement survey. Journal of Gerontology: Social Sciences, 55B(3), S131-S140. https://doi.org/10.1093/geronb/55.3.S131
McKee-Ryan, F., Song, Z., Wanberg, C. R., & Kinicki, A. J. (2005). Psychological and physical well-being during unemployment: A meta-analytic study. Journal of Applied Psychology, 90(1), 53–76. https://doi.org/10.1037/0021-9010.90.1.53
Mishra, A. K., & Spreitzer, G. M. (1998). Explaining how survivors respond to downsizing: The roles of trust, empowerment, justice, and work redesign. Academy of Management Review, 23(3), 567-588. https://doi.org/10.5465/amr.1998.926628
Moser, K. (2009). Strategies for retaining and rehiring key employees after a downturn. Journal of Accountancy, 208(2), 60-65.
Noer, D. M. (2009). Healing the wounds: Overcoming the trauma of layoffs and revitalizing downsized organizations. Jossey-Bass.
Paul, K. I., & Moser, K. (2009). Unemployment impairs mental health: Meta-analyses. Journal of Vocational Behavior, 74(3), 264-282. https://doi.org/10.1016/j.jvb.2009.01.001
Jonathan H. Westover, PhD is Chief Academic & Learning Officer (HCI Academy); Chair/Professor, Organizational Leadership (UVU); OD Consultant (Human Capital Innovations). Read Jonathan Westover's executive profile here.
