Suppose a recession hits and you, a manager, have to cut your wage bill. How best to accomplish this?
Recent research by Sucher and Gupta (2018) detects some negative effects of layoffs:
- Higher turnover of remaining employees & clients/customers.
- Lower morale, product quality, safety, and innovation.
In addition, if a worker leaves permanently, you will lose your investments in her training and any relationships (e.g. with clients) that she has formed on the job.
However, a lot can depend on the culture of your industry. If workers expect occasional layoffs, they may still be your best bet. An example is the construction industry.
If layoffs are not part of your industry culture, consider alternatives such as furloughs, cuts in hours, wage freezes, and so on.
Recent research by Sandvik et al shows that wage cuts can raise turnover, especially among your most productive workers.
To minimise this risk, hold meetings to explain your decisions. Share with your workers how painful the process is for you. Show empathy. Cut your own wage and make sure your employees know that you did.
In part 3, I will explore how you should shift your investment strategy when a recession threatens.