Does downsizing improve organisational performance? An analysis of Spanish manufacturing firms

Abstract

The objective of this study is to examine the effect of downsizing on corporate performance, considering a sample of manufacturing firms drawn from the Spanish Survey of Business Strategies for the 1993–2005 period. No significant difference in post-downsizing performance arises between companies that downsize and those that do not. Likewise, we find that substantial workforce reductions through collective layoffs do not lead to improved performance levels either. Downsizing may not, therefore, be a way for managers to enhance performance. This is particularly true of Spain, where the labour market is characterised by the ring-fencing of employees' rights and substantial severance costs.

Keywords:

• corporate performance
• downsizing
• Spanish labour market

Acknowledgements

Financial support is gratefully acknowledged from Universidad Carlos III de Madrid (Project CCG07-UC3M/HUM-3287) and from the Spanish Commission for Science and Technology-ERDF (Projects SEJ2007-63879, ECO2008-01513/ECON and ECO2010-21078).

Notes

1. The American Management Association, which has conducted a series of large-scale studies on downsizing, found that most companies fell short of the objectives they had originally established, and that nearly half of the firms were ‘badly’ or ‘not well’ prepared for the process (reported in Cascio 1993, pp. 97–99; see also De Meuse et al. 1994).

2. We must take into account that these constraints on the hiring and firing of workers are not entirely transparent, since in addition to national laws, collective agreements between employers and worker organisations are also very important in regulating the adjustment of the labour factor – these agreements may differ across industries and workers (depending upon age, tenure, etc.).

3. The 1994 and 1997 reforms tried to promote the use of open-ended work contracts by firms through the reduction of their associated severance costs (Toharia and Malo 2000). Specifically, the 1997 reform tried to reduce firms' reliance on temporary work contracts though the introduction of a new open-ended contract characterised by lower severance payment in cases of unfair dismissal (Malo and Toharia 2008).

4. Legal grounds for a disciplinary dismissal are strictly defined by law and involve only repeated absenteeism or lack of punctuality, insubordination or disobedience, physical or verbal abuse, breach of contractual good faith, and voluntary and continuous reduction of job productivity or habitual drunkenness or drug addiction that negatively affects job performance.

5. Both parties usually prefer to reach an agreement rather than prolong the dispute, as if no agreement is reached, they will necessarily have to abide by an uncertain ruling by the judge. In addition, the judge's decision is an important parameter in the bargaining process because it seems that the employers tend to be wary of the judges' perceptions of their supposed ‘economic difficulties’. This implies that the maximum severance pay established for unfair dismissals (45 days' wages per year of service with a maximum of 42 months' wages) tends to be the norm (even the minimum settlement) in the conciliation procedure (Malo 2001).

6. A redundancy will be declared null and void if it is due to any of the discriminatory causes prohibited by the Constitution or legislation, or if it violates employees' fundamental or collective rights. An annulled redundancy will result in the immediate readmission of the employee.

7. These complements for the pension negotiated within the collective layoff process may explain, for instance, that in the year 2001, 55% of the newly retired individuals in the General Social Security System were under the age of 65, and 29% were under 60. In fact, that year, 21,712 individuals took early retirement before the age of 65 – Spanish Labour Force Survey, fourth quarter, 2001 (Instituto Nacional de Estadística (INE) [Spanish Statistical Office]).

8. This definition conveys the usual idea of intentionality found in the downsizing literature, since (i) it excludes temporary employees (which is standard practice) and (ii) includes layoffs, redundancies and early retirements. Thus, if despite implementing layoffs of permanent workers in a particular year the company ends up with an increase in the size of the permanent workforce (due to hiring new permanent workers), this situation is not considered as downsizing, according to our definition. Defining downsizing as the (net) reduction in the permanent workforce is consistent with, among others, Tang and Fuller (1995), Appelbaum, Simpson and Shapiro (1987), Lewis and Johnston (1996) or the American Management Association (1998).

9. We ran a Hausman test to choose between these estimators (results are not shown, but are available upon request). This tests the null hypothesis that the coefficients estimated by the random-effects estimator are the same as the ones estimated by the fixed-effects estimator (Hausman 1978).