Could a more robust social safety net prove a boon to business?
This counterintuitive insight is one of the conclusions researchers at Columbia Business School developed from a recent analysis that found a link between higher unemployment benefits and managers’ willingness to lay off workers during economic downturns. In the past year, as major employers like Meta, Google, and Amazon engaged in historic downsizing, this new research adds an interesting layer to our understanding of layoffs.
Daniel Keum, associate professor of business in the Management Division at CBS, and Stephan Meier, the James P. Gorman Professor of Business and chair of the Management Division at CBS, investigated the relationship between expanded unemployment benefits and business leaders’ decision to downsize. They discovered that, paradoxically, better benefits can create a climate in which companies are more apt to trim their workforce as needed to better position the company for future growth. Their paper, “License to Fire? Unemployment Insurance and the Moral Cost of Layoffs,” is forthcoming in Organization Science.
Unearthing the Unemployment Paradox
Until now, it was believed that expanding unemployment benefits would likely discourage downsizing. Those benefits are funded by payroll taxes, with the tax rate going up for companies that recently laid off employees — effectively putting a tax on workforce reductions. That equation was assumed to discourage layoffs. But Keum and Meier’s research turns that assumption on its head.
Their empirical analysis looked at expansions in unemployment insurance by state governments between 1976 and 2007, and found that more generous unemployment insurance actually led to an increase in layoffs. According to their analysis, firms with below-industry performance laid off 4.3 percent of their workers. But when unemployment insurance benefits increased by 10 percent, there was a notable corresponding rise in layoffs — with another 0.78 percent of employees getting laid off, a significant 18.1 percent increase in rate.
The explanation for this counterintuitive connection can be found in the new variable Keum and Meier considered in their analysis: the “moral cost” of layoffs. It's part of a new and growing body of research that examines so-called prosocial behavior within management. The study found that “when at-risk workers have a more generous social program cushion to fall back on, managers may become morally licensed to lay off more workers.”
Being nimble during a downturn can be essential to a company’s survival, ultimately saving jobs over time. “If you put in stronger social safety nets,” Keum says, “it helps good managers be more efficient and encourages growth down the road.”
But Keum considers layoffs to be one of the more taxing experiences for managers and employees alike. And his research implies that, even while we are seeing massive reductions in the workforce, their “moral cost” could be keeping managers from acting as quickly, or at the scale, they believe is best for the long term.
Indeed, when news reports surfaced at the beginning of the year of employees hearing they were dismissed by an impersonal and antiseptic email, Keum was not surprised.“Everybody knows that you should sit down with people before you let them go and just be humane,” Keum says. “Why don’t [companies] do that? It turns out managers find this extremely stressful. They get ulcers and even depression after implementing layoffs.”
The paper’s analysis suggests that layoffs can be particularly traumatic when workers are largely left to their own devices to cope with the loss of income. Keum points to Denmark as an example of how a country can create a supportive social safety net. In Denmark, the guarantee of generous unemployment and medical insurance helps create a more flexible workforce, he says. “Managers can say ‘Sorry, you’re a poor fit for us, but you’re not going to starve,’” Keum says. “And employees resist layoffs less, too.”
What Works for the Future
Moving forward, Keum and Meier are exploring which factors contribute to fostering more empathetic managers who bear greater responsibility for their employees’ well-being, even when a company faces layoffs. “Some people say nice guys finish last and don’t make it to CEO, and view corporate leaders in an extremely negative light,” Keum says. “How can we get nice guys to the top?”
Part of the answer may lie in enhanced unemployment insurance, which could be a vital asset in business development. When Keum considers the trade-offs many companies face when needing to trim costs during a downturn, the negativity of layoffs is a better business decision than the risks of losing the company’s competitive edge. He also urges companies to resist cutting back on research and development (R&D) or corporate social responsibility (CSR) projects. “Those are longer-term assets, and you need to think clearly about what’s needed when things pick up again,” he says.
Research conducted by Keum’s colleague, Caroline Flammer, a professor at Columbia’s School of International and Public Affairs and the Columbia Climate School, also supports this approach. Her research found that the firms that thrived coming out of the financial crisis of 2007 through 2009 were those that trimmed their workforce but maintained their R&D and CSR funding.
“If you’re a little behind, this type of disruption provides a great opportunity for laggards to catch up,” Keum says. “If you make a $100 million R&D investment, it doesn’t do much when your competitor is making the same investment; but in uncertain times, when most companies are more conservative in their investments, there’s a great window of opportunity.”
While it is painful to lay off workers, strategic thinking for the long term improves the company’s future prospects — and the most effective managers embrace that long-term outlook. “Innovation is what creates new things and brings us forward. Everyone talks about it in a good way at a macro level, but at a micro level, for employees and even firms, it’s extremely destructive,” Keum says.
“Restructuring in the workforce is not an easy process; it’s time consuming and legally it’s a costly decision. But some companies should do it for the long term,” he says. “Sometimes you need to let some people go.”