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Not All Firms Are Hiring or Increasing Pay. Some Are Instead Making Cuts and these Cuts Are Targeted Based on Performance.

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As we saw, in the economy overall, employers continue to have trouble finding enough employees, which in turn drives higher pay. However, that is not true everywhere. Some firms have decided they need to cut costs and labor costs are typically a major cost area. Labor cost = labor cost per employee x the number of employees. Thus, to cut labor costs, it is necessary to cut salaries, bonuses, benefits, etc., or cut the number of employees. Alphabet-owed Google recently cut 12,000 employees or 6% of its full-time workforce. Also making employment cuts (layoffs) was Dow, Inc., IBM, SAP SE, Microsoft, Ford, Meta Platforms Inc. (Facebook) and FedEx. On the other hand, Apple (so far) has not announced layoffs. 

Earlier, we saw that Walgreen was increasing bonuses. Bonuses are sometimes referred to as variable pay. In addition to considering employment cuts, Goldman Sachs is considering changes to its bonus payouts. 

The Federal Reserve (Federal Open Market Committee) is in the news a lot. The “Fed” has a dual mandate to hold down both inflation and the unemployment rate. Firms in different sectors of the economy may be affected differently and there are implications for employment and pay. However, as former NY Yankees catcher Yogi Berra (winner of 10 World Series, most ever) is purported to have said, “prediction is hard, especially when it is about the future.” (You can look it up.) Likewise, firms may find it hard to predict what the Fed will do and what the consequences will be for them specifically. 

 

Discussion Questions: 

  1. Why are these firms reducing employee headcount while other firms are trying to hire more employees? 

  1. Do firms do across-the-board layoffs, or their layoffs targeted? Consult the sources listed below to find out who FedEx and Ford are targeting in their layoffs. Provide your analysis of whether the targeted nature of their layoffs makes sense. 

  1. Apple has not thus far announced layoffs. How have they avoided layoffs? Why don’t they feel layoffs are required to reduce labor costs? 

  1. Layoffs have some permanence to them. So do wage/salary increases. Is there any other way to reduce labor costs when necessary? What about bonuses? Can they also be variable downward? Again, consult the sources below to see what Goldman Sachs and other Wall Street banks are doing around bonuses and why. 

  1. Is a company like Goldman Sachs, which is also planning job cuts (and changes to bonuses), also shutting down all of its hiring and recruiting? Why or why not? 

  1. The Federal Reserve (Federal Open Market Committee) takes actions around monetary policy. How is the Fed’s monetary policy relevant as firms make decisions regarding, pay, hiring, and layoffs? What can firms do (in terms of staffing, including temporary staffing and wages, bonuses, and benefits) to deal with uncertainty about what the Fed will do and what the consequences will be? 

Note for Instructors: Emphasize to students that the job market goes through cycles, from the challenge in finding enough (qualified) employees to run the business and grow revenue to the challenge of having too many employees and not enough revenue to keep all of them. In many cases, layoffs are targeted. Ford (and Google) are targeting low performers. FedEx is targeting corporate/white-collar staff, not those who move its packages. At the same time, however, firms may continue to hire. Goldman Sachs is an example of that. 

Also, for employers looking for labor cost flexibility without committing to more permanent steps like layoffs and wage/salary increases, bonuses offer such flexibility by making pay variable. They are less permanent. They can be increased or decreased, depending on the current challenge/situation. Other (short-term) staffing related solutions from earlier chapters can also be considered here as a means of achieving more flexibility such as use of temporary/contract workers and outsourcing. 

The Federal Reserve (Federal Open Market Committee) monetary policy has been “restrictive.” https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20230201.pdf. Such a restrictive policy reduces economic activity and growth. Firms must decide how much such a restrictive policy will reduce their own revenues and revenue growth. That, in turn, may influence how many employees are needed and how much they are paid. Demand for labor is sometimes described as a “derived demand” in that demand for labor (desired employee headcount) depends on product demand (e.g., revenues). Again, labor does not have to be in the form of employees. Workers do not have to be employees. They can be temporary/contract workers or workers in firms where work has been outsourced. 

Sources: Jennifer Elias. Google employees scramble for answers after layoffs hit long tenured and recently promoted employees. CNBC.com, January 21, 2023. Chip Cutter and Theo Francis. Layoffs Edge Higher in Tight Job Market. Wall Street Journal, January 27, 2023. Esther Fung and Will Feuer. FedEx to Trim Manager Ranks by over 10%. Wall Street Journal, February 2, 2023. Tom Dotan. Microsoft to Lay off 10,000, Cites Shaky Economy. Wall Street Journal, January 19, 2023. David Benoit and AnnaMaria Andriotis. Big Banks to Slash Bonuses as Deal Fees Slide. Wall Street Journal, December 29, 2022. AnnaMaria Andriotis and Justin Baer. Goldman Plans Big Job Cuts, Reductions in Some Bonuses. Wall Street Journal, December 17-18, 2022. Justin Lahart. Mega-companies mess up the Job Market. Wall Street Journal, November 26-27, 2022. Nora Eckert. Ford Targets Underperforming Staff. Wall Street Journal, November 1, 2022. Jennifer Elias. Google tells employees more of them will be at risk for low performance ratings next year. CNBC.com, December 22, 2022. Aaron Tilley. How Apple Has So Far Avoided Layoffs: Lean Hiring, No Free Lunches. Wall Street Journal, January 21, 2023.