factors affecting permanent workforce reduction: evidence from large canadian organizations

Factors Affecting Permanent Workforce Reduction: Evidence from Large Canadian Organizations Terry H. Wagar Wilfrid Laurier University

Abstract Despite an extensive practitioner literature on workforce reduction, relatively few Canadian studies have empirically examined the determinants of workforce reduction policies. Using data from more than 1,000 organizations across the country, this study investigated factors associated with permanent workforce reduction strategies. Fifty-three percent of the respondents permanently reduced their workforce during the two-year period of the study (with an average reduction of almost 15% of the workforce). Multinomial logit was used to compare organizations that had and had not engaged in employee cutbacks. The results revealed that diTerences in workforce reduction strategies were associated wirh the economic environment, characteristics of the organization, and human resource management policies.

Rarely is it possible to browse through a major newspaper and not come across an article reporting the layoff of employees or the closure of a business. However, despite the near obsession of several organizations with reducing the workforce, relatively little research has focused specifically on permanent workforce reduction (Cameron, Sutton, & Whetten, 1988; Leana & Ivancevich, 1987). Rather, organizational scholars have, until recently, exhibited a strong prefer- ence for studying growing companies (Whetten, 1987). Moreover, while a review of the practitioner literature reveals a host of articles addressing downsizing and

The funding of the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. As well, I wish to acknowledge the very capable research assistance of Nancy Mills and the helpful comments of the three anonymous referees. Address all correspondence to Terry H. Wagar, School of Business and Economics, Wilfrid Laurier University, Waterloo, ON, Canada, N2L 3c5.

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Rbsume' Malgre' 1 'abondance de la documentation qui existe sur la pratique de la re'duction des effectifs, relativement peu d 'e'tudes canadiennes ont examine' empiriquement les de'terminants des politiques de re'duction des effectifs. Base'e sur les re'ponses de plus de 1,000 organisations dans tout le pays, cette e'tude se penche sur les facteurs qui de'terminent les strate'gies de re'duction permanente des effectifs. Cinquante-trois pour cent des re'pondants ont re'duit leur personnel de facon de'$nitive pendant les deux anne'es de l'btude (re'duction moyenne de prks de 15% des effectifs). Des organisations qui ont et qui n'ont pas re'duit leurs effectifs ont e'te' compare'es au moyen d 'un logit multinomial. Les re'sultats montrent que les strate'gies de re'duction des effectifs de'pendent de la con- joncture, des caracte'ristiques de l'organisation et des politiques de gestion des ressources humaines.

workforce reduction, the writings are largely prescriptive, typically unsupported by empirical research, and often in conflict.

Around the world, organizations are striving to become more competitive as they struggle to meet the challenges of the global marketplace. Traditional notions of job security and rewards for loyalty and long service to the organization have, in many instances, been replaced by continuous change, uncertainty, and considerable shedding of employees (Mathys & Burack, 1993). Associated with such developments is the considerable pain, stress, and hardship inflicted on employees (both workers who have lost jobs and "survivors," those who remain with an organization). In addition, there is mounting evidence that many downsizing efforts fail to meet corporate objectives (Cameron, 1994; Cascio, 1993).

Despite the extensive number of organizations engaging in workforce downsizing and restructuring,

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few Canadian studies have investigated the determinants of permanent workforce reduction strategies (in fact, popular press reports on employee cutbacks are often based on a small number of American reports). The present study has two major objectives. First, using data from 1,140 large Canadian organizations, it provides evidence concerning the frequency of workforce reduction. Second, it examines the relationship between an employer’s workforce reduction strategy and a number of environmental and organizational variables by comparing organizations that have and have not engaged in permanent employee cutbacks.

Review of the Literature

Workforce reduction and organizational restructuring are beginning to attract research interest. In addition to an extensive and growing practitioner literature on workforce reduction (see, for instance, Adamson & Axmith, 1983; Byme, 1994; Hansen, 1985; Nienstedt, 1989; Tomasko, 1990, 1991), there is an increasing focus on strategic responses to downsizing (for example, Koys, Armacost, & Charalambides, 1990; Lawrence & Mittman, 1991; Mathys & Burack, 1993). In 1993 that the Strategic Management Journal devoted its entire summer 1993 issue of the journal to the topic of corporate restructuring.

In recent years, a number of researchers have used case studies to study the workforce reduction process (Cornfield, 1983; Hardy, 1987, 1992; Teram & Hines, 1988). Furthermore, a growing area of research (and one of particular interest to organizational decision-makers) involves an examination of the consequences of workforce reduction and organizational decline (Cameron, Freeman, & Mishra, 1991; Cameron, Whetten, & Kim, 1987). In addition, there is a substantial body of literature on the impact of layoffs on survivors (for instance, see Armstrong-Stassen, 1993; Brockner, Grover, O’Malley, Reed, & Glynn, 1993; Brockner, Grover, Reed, & DeWitt, 1992; Tombaugh & White, 1990) and some research addressing the vulnerability of different occupational groups to displacement (Cappelli, 1992).

While several writers have noted that organizations struggling to get through hard times (Cascio, 1993) and firms suffering a business downturn (Greenberg, 1991) are more likely to downsize, few researchers have examined the determinants of a permanent workforce reduction strategy. As well, there is little work examining the effect of environmental and organizational characteristics on the nature and severity of the workforce reduction measures employed by the firm.

From a conceptual perspective, a well-developed model of workforce reduction behaviour simply does not

exist. However, theoretical insights from the economics, organizational decline, and management literature provide some guidance in describing workforce reduction behaviour at the organizational level.

In reviewing the economics literature, both internal labour market theory and implicit contract theory are helpful in explaining why at least some employers have a commitment to job security and permanent employment of workers. Some organizations are characterized by the development of internal labour markets in which new employees are hired at specific “ports of entry” and other positions are filled through internal transfers and promotions (Doeringer & Piore, 1971). In addition, employers relying on implicit contract theory recognize the existence of a mutual commitment by both employers and workers to long-term employment, and view job hirings as “implicit contracts” in which employees are given certain assurances regarding security of wages and employment (Gordon, 1974).

However, historically acknowledged provisions of the psychological contract between employers and workers are changing, with several organizations unwilling to promise job security and continued employment to loyal, senior employees (Marks, 1988; Grosman, 1989). Rather, a new employment arrangement between employees and a number of employers is emerging. O’Reilly (1994, p. 44) describes this “new deal” as fol- lows:

You’re expendable. We don’t want to fire you but we will if we have to. Competition is brutal, so we must redesign the way we work to do more with less. Sorry, that’s just the way it is. And one more thing-you’re invaluable ... We’re depending on you to be innovative, risk-taking, and committed to our goals.

At a time when we are witnessing the emergence of new employment relationships, there is also a call for greater cooperation between labour and management. However, changes in managerial attitudes and behav- iours are essential if cooperation between labour and management is going to succeed (Achison, 1991; Cooke, 1990a). Moreover, the movement toward greater cooperation between labour and management is not without its critics. For instance, Banks and Metzger (1989), Grenier and Hogler (1991), and Parker and Slaughter (1989) describe negative aspects of participatory programs and argue that such programs are frequently designed to increase managerial domination of the workplace. Not surprisingly, securing commitment to joint labour-management initiatives is very difficult when an organization is cutting the number of employees.

In examining the organizational decline literature, the model of workforce reduction for declining firms

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proposed by Greenhalgh, Lawrence, and Sutton (1988) represents a significant contribution in terms of developing a theoretical framework in which to investigate permanent workforce reduction policies. They identify five approaches to workforce reduction (attrition, induced redeployment, involuntary redeployment, layoffs with outplacement assistance, and layoffs without outplacement assistance) with each subsequent approach provid- ing workers with a lower degree of protection. The authors assert that an organization’s approach to workforce reduction is affected by a number of factors, including environmental and firm characteristics. Although the present article is not a test of Greenhalgh et al.’s model, specific aspects of the model, as it relates to the current study, are referred to later in the article (see the Method section).

Latack (1990) built on Greenhalgh et al.’s work in what she called a “managerial process model of inplacement.” As defined by Latack, inplacement refers to a career management strategy aimed at reabsorbing excess or inappropriately placed workers into a restructured organization, while “outplacement” focuses on the pro- vision of a program of counseling and job-search assistance for workers who have been terminated.

In the model, Latack argued that in making career- management decisions, organizational decision-makers may opt for an inplacement strategy or termination with outplacement.’ She outlined two sets of factors (external and internal) that may influence the career-management decisions made by ,the organization. External factors include market or economic factors (such as declining market share or lower earnings), public policy (such as advance notice of layoffs), cultural attitudes, private ver- sus public sector, and public or private firms. The internal factors are the organizational culture and employment security policy of the organization, characteristics of the organization (workforce oversupply, labour-management relationship, size and structure, history, slack resources, human resource systems, strategic career development, and transition management strategy), and employee characteristics (skills and performance, career motivation, and coping strategies). In the model, Latack saw external factors as moderating the linkage between career-management decisions made by the firm and the culture and employment security policy of the organization.

As noted previously, there has been little attempt to empirically test the propositions outlined by Greenhalgh et al. (1988) or Latack (1990). Rather, the limited research with the organization as the level of analysis tends to be descriptive and U.S.-based. For example, the American Management Association has conducted a survey of workforce reduction practices since 1986. The AMA studies revealed that expressed corporate policies on job security have remained relatively constant since

1986, with about 55% of respondents indicating that their firm would make reasonable efforts to retain employees during an economic downturn and a further 30% reporting that their firm would do anything it could to avoid layoffs. In addition, workforce reduction has become an ongoing corporate activity, with approximately 40% to 60% of respondents reporting downsizing. While larger organizations were more likely to engage in workforce reduction, smaller firms tended to reduce the workforce by a larger amount.

McCune, Beatty, and Montagno (1988) surveyed 38 firms in the Midwestern United States and concluded that unionized firms were more likely to reduce the workforce, while there was no significant relationship between the probability of workforce reduction and company size.

In a study of 178 Canadian organizations, Luce (1983) found that a firm’s retrenchment philosophy was related to the economic climate, the external environment (the legal environment, industry and sector of the organization, and population and labour market demographics), and the internal environment (employee demographics, the human resource philosophy and management system, organizational structure, and previous experience with workforce reduction). Based on extensive case studies of 10 organizations in Canada and Britain, Hardy (1987) concluded that firms considering downsizing should maintain a long-term focus, recognize the importance of balancing both organizational and individual needs, and assess the hidden costs associated with retrenchment.

Although not concerned directly with workforce reduction, Long (1993) investigated the effect of unionization on the employment growth of 510 Canadian firms over the period 1980 to 1985. After controlling for firm size, firm age, and industry sector, Long found that unionized firms grew 3.7% more slowly in the manufacturing sector and 3.9% more slowly in the service sector. However, the negative union effect on employment growth was not found for small firms. These results are generally consistent with those obtained by researchers in the United States (Leonard, 1992) and Britain (Blanchflower, Millward, & Oswald, 1991). In addition, Montgomery (1991) found, using establishment data from the United States, that unions tended to increase layoff rates in nonmanufacturing industries.

Method

Data

The data for this study were obtained from survey responses to a questionnaire sent to medium-sized and


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large organizations across Canada. In order to be included in the sample, organizations had to have a minimum of 100 employees (as identified in the mailing list provided by Dun and Bradstreet) and fall within one of seven industry groups (manufacturing, wholesale and retail trade, communication and transportation, finance and insurance, other business services, health, and education). Note that a small number of respondents actually slipped below the 100-employee mark as a result of workforce reduction programs.

Surveys were mailed to either the senior human resource management executive or the chief executive officer (with a note asking the recipient to forward the survey to another individual if that person was in a more appropriate position to complete the questionnaire). After one follow-up mailout, a total of 1,282 organizations responded to the survey (for a response rate of just over 35%). Due to missing data on some of the variables, this study is based on responses from 1,140 organizations.

Dependent Variable

The dependent variable in this study is the organization’s workforce reduction strategy. In constructing this variable, organizations that did and did not permanently reduce the workforce had to be distinguished. In addition, it was necessary to consider both the size of the workforce reduction and how it was carried out (for instance, did the organization use attrition, voluntary severance, and/or layoffs?). While I use the term workforce reduction strategy to categorize organizations based on their approach to workforce reduction, this does not necessarily indicate that the decision was strategic; in fact, there is evidence that many workforce reductions are carried out with little strategic planning or con- sideration of the costs to the individuals and employer (Cascio, 1993).

Respondents to the survey were asked whether their organization had permanently reduced the workforce over a two-year period beginning in January 1990. In addition, respondents who had permanently reduced their workforce were asked a series of questions about the reduction, including the percentage of the workforce reduced and the percentage of the workforce reduced by layoff (more specifically, the survey asked respondents to indicate the percentage of the workforce reduced by attrition, voluntary severance programs, and layoff or termination). As noted by several writers, including Greenhalgh et al. (1988) and Tomasko (1991), layoff is considered the most severe reduction approach.

While it is possible to examine the probability of permanent workforce reduction, the size of the reduction, and the approach to workforce reduction as separate

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variables, this paper categorizes respondents based on their reduction strategy. It is not proper to simply multi- ply the percentage of the workforce reduced with the percentage reduced by layoff in order to measure the severity of the downsizing.* In order to combine both the size of the reduction and the approach to downsizing, it was necessary to categorize organizations. For the purposes of the study, organizations were classified in one of four categories: NOREDN, or nonworkforce reducers (organizations not reducing the workforce); MIL- DREDN, or smaller, less severe reducers (organizations reducing the workforce by less than 10% and doing so by using layoffs less than one-third of the time); MODREDN, or smaller, more severe reducers (employers reducing the workforce by less than 10% and using layoffs one-third or more of the time); and SEVREDN, or larger, more severe reducers (reductions of at least 10%; most organizations reducing the workforce by 10% or more relied heavily on layoffs, thus a single category was created for reductions of at least 10%).

Independent Variables

For the purposes of presentation, the nine independent variables examined in the analysis were grouped under four categories: the economic environment, characteristics of the organization, human resource management policies, and union status. Variable definitions and summary statistics are reported in Table 1.

In examining the economic environment, a single measure (MKTDEM, or the market demand for the organization’s primary product or service) was used. This variable was measured using a 6-point scale (1 = substantial decline and 6 = substantial increase). Based on a substantial body of literature (for instance, Greenhalgh et al., 1988; Latack, 1990; Tomasko, 1991), it was hypothesized that organizations with declining demand for their product or service would rely on a more severe workforce reduction strategy.

The five variables included in the organizational characteristics category were three dichotomously coded variables relating to change within the organization (MCHANGE, or major change in management or corporate strategy; MERGER, or involvement in a merger or acquisition; and TECH, or introduction of new labour- saving technology; presence of the variable was coded 1 and absence was coded 0); ORGSIZE, or size of the organization (natural logarithm of the number of employees); and industry sector, which included RETAIL (wholesale and retail trade), COMMN (communication and transportation), FINANCE (finance and insurance), HEALTH (health care), EDUCN (education), and OTHERSER (other business services). Manufacturing was the omitted category. It was antici-

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Table 1 Variable Definitions and Summary Statistics (Independent Variables)

Variable Definition M SD

MKTDEM

MCHANGE

MERGER

TECH

ORGSIZE

RETAIL

COMMN

FINANCE

HEALTH

EDUCN

OTHERSER

TRAIN

EECOMMIT

UNION

Demand for organization’s primary product or service

Major change in management or organization strategy over past three years

Involvement in merger/acquisition over past five years

Introduction of new labour-saving technology over past five years

Natural logarithm of number of employees

Organization operates in retail sector

Organization operates in communication/ transportation sector

Organization operates in financial services sector

Organization operates in health sector

Organization operates in education sector

Organization provides some other service

Presence of formal training program

Overall commitment of organization to job security

Union status of organization (l=union)

3.571

0.575

0.285

0.264

5.965

0.108

0.066

0.075

0.134

0.105

0.168

0.430

4.487

0.578

1.185

0.495

0.452

0.441

1.28 1

0.310

0.248

0.263

0.341

0.307

0.374

0.392

1.058

0.494

pated that organizations experiencing major change (Applebaum, Simpson, & Shapiro, 1987; Voos, 1985) would utilize a more severe reduction strategy. Based on the descriptive results from the American Management Association studies (1987- 1992), it was hypothesized that larger organizations would be more likely to engage in less severe reduction strategies. With reference to the industry sector of the organization, the existing literature suggests the use of less severe reduction strategies in public or quasipublic organizations (Greenhalgh et al., 1988; Latack, 1990). Consequently, it was expected that

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organizations in health and education would be more likely to opt for less severe reduction strategies.

Two variables addressed aspects of human resource management policies. Commitment to training (TRAIN) was measured by having respondents indicate whether their organization had a formal, regularly scheduled training program for employees in six major work groups (executives and managers, professional and tech- nical employees, first-line supervisors, sales employees, clerical and service employees, and production and maintenance employees). An organization’s score was

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calculated by summing the number of work groups that have a program divided by the number of work groups present in the organization (for instance, a respondent with no training programs would have a score of 0.00, while a firm with regular programs for all work groups would have a score of 1.00).

Commitment to job security (EECOMMIT) was determined by asking respondents to indicate, using a 6- point scale (where l=low commitment and 6=high commitment), how committed their firm is to job security for the six work groups outlined above. The overall mean score for the organization was calculated by summing the commitment ratings for each work group present in the firm and dividing the total by the number of work groups (Cronbach’s coefficient alpha = .95).

It was hypothesized that organizations with a higher commitment to training (Becker, 1980; Osterman, 1987) and an espoused value system emphasizing job security (Greenhalgh et al., 1988; Latack, 1990) would tend to use a less severe workforce reduction strategy.

The union status of the organization (UNION) was dichotomously coded depending on whether the organization was unionized or not (l=union, O=no union). The existing literature on the relationship between union status and workforce reduction behaviour is limited, and the results are inconclusive. McCune et al. (1988) found that unionized firms in the United States were more likely to downsize, Long (1993) concluded that unionized organizations in Canada experienced slower employment growth than nonunionized firms, and Greenhalgh et al. (1988) argued that unionized firms are less likely to utilize severe reduction strategies as a result of collective agreement provisions encouraging dialogue and propos- als aimed at avoiding layoffs. Consequently, the previous research is mixed concerning union status and workforce reduction behaviour.

Results

Descriptive Statistics

When considering characteristics of the respondents (see Table l), the organizations participating in the study were, on average, fairly large (the mean number of employees was 1,260). Just under 58% of the respondents were unionized companies. The industry sector breakdown was 10.8% in retail, 6.7% in communications, 7.5% in financial services, 16.8% in other services, 13.4% in health, 10.5% in education, and 34.4% in manufacturing/construction.

As indicated in Table 1, MKTDEM (demand for the organization’s primary product or service) had a mean of 3.6, which was just above the midpoint of the scale.

Approximately 29% of respondents had been involved in a merger or acquisition, just over one-quarter had introduced labour-saving technology, and almost 58% reported a major change in management or strategy.

Commitment to job security (EECOMMIT), which represents the firm’s average of the responses for each of the different work groups, had a mean score of 4.49. With reference to commitment to training (TRAIN), the mean score was 0.43, suggesting a moderate level of commitment to training (as measured by the presence of formal training programs for the different work groups).

Workforce Reduction Behaviour

When considering workforce reduction behaviour, 536 (47%) of the respondents indicated that they had not permanently reduced the workforce over the two-year period commencing in January 1990, while 604 (53%) had engaged in downsizing. With reference to those employers that had permanently reduced their workforce, the average size of the workforce reduction was 14.9%. Although organizations varied in their approaches to workforce reduction, an average reduction was 21% of the workforce by attrition, 13% by voluntary severance, and 60% by layoff.

Further analysis revealed that 75% of the organizations downsizing their operation used attrition, 52% used voluntary severance programs, and 90% used layoffs, and they frequently utilized a combination of these methods in their workforce reduction program.

As mentioned previously, it was possible to categorize respondents based on the size of the workforce reduction and the use of layoff as an approach to reducing the workforce. As revealed in Table 2, 9.6% of respondents used a smaller, less severe approach (MILDREDN); 11.8% used a smaller, more severe approach (MODREDN); and 3 1.6% used a larger, more severe approach (SEVREDN). As noted above, 47.0% of participants did not permanently reduce the workforce.

Multinomial b g i t Estimation Results

In order to investigate whether there is a relationship between the independent variables and the approach to workforce reduction, multinomial logit was used.3 As presented in this paper, the general form of the multinomial logit equation is:

ln,(PjP,) = a + bjX + e, i = 1,2,3;j = 1,2, ... n

More specifically, the actual multinomial logit equation estimated in this article is:


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FACTORS AFFECTING PERMANENT WORKFORCE REDUCTION.. . WAGAR

Table 2 Summary Statistics for Workforce Reduction Behaviour (Dependent Variable)

Workforce reduction behaviour Frequency Percentage

No workforce reduction (NOREDN)

Smaller less severe reduction (MILDREDN)

Smaller more severe reduction (MODREDN)

536

109

135

47.0

9.6

11.8

Larger more severe reduction (SEVREDN) 360 31.6

Table 3 Results of Multinomial Logit Estimation of Workforce Reduction Behaviour

Variable MILDREDN MODREDN SEVREDN

MKTDEM

MCHANGE

MERGER

TECH

ORGSIZE

RETAIL

COMMN

FINANCE

HEALTH

EDUCN

OTHERSER

TRAIN

EECOMMIT

UNION

Constant

Log-likelihood 2

-0.370 *** (0.116) 0.329 (0.230)

(0.296) 0.730 *** (0.274) 0.353 *** (0.090) 0.786 (0.481) 1.335 ***

(0.447) 1.515 ***

(0.459) 1.698 ***

(0.399) 1.540 ***

(0.43 1) 0.522 (0.456) 0.032 (0.29 2)

(0.117) 0.356 (0.287) -5.794 *** (0.966)

-0.424

-0.141

-1 116.398 493.906 ***

-0.430 *** (0.105) 0.274 (0.2 12) 0.259 (0.256) 1.116 ***

(0.242) 0.169 * (0.089) 0.395 (0.395)

(0.501) 0.147 (0.484) 1.445 ***

(0.321) 0.912 ** (0.377) 0.423 (0.335)

(0.270)

(0.103) 0.4 15 (0.254)

(0.846)

-0.124

-0.279

-0.326 ***

-3.319 ***

Note: Standard errors are in parentheses. * p <.lo **p <.05 ***p <.01

-0.838 *** (0.08 1) 0.857 *** (0.171) 0.086 (0.182) 1.250 ***

(0.190)

(0.073)

(0.27 2) -0.728 ** (0.364) -0.221 (0.336) -0.43 1 (0.325)

(0.346)

(0.236) -0.384 * (0.222) -0.357 *** (0.081) 0.117 (0.183)

(0.660)

-0.093

-0.007

-0.065

-0.358

-1.876 ***

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ln,(PjPo) = a + 6,lMKTDEM + b,MCHANGE + 6,MERGER + b4TECH + 6,ORGSIZE + b6RETAIL + 6,COMMN + 6,FINANCE + b9HEALTH + 6,oEDUCN + b,,OTHERSER + 61,TRAIN + 613EECOMMIT + b,,UNION

where (PIP,) is the relative probability of choosing one workforce reduction strategy (Pi) over another (Po).

Each of the three columns in Table 3 shows the multinomial logit estimates associated with the probabil- ities of choosing that particular workforce reduction strategy (MILDREDN, MODREDN, SEVREDN) over NOREDN (the no-workforce-reduction group).

The coefficients on MKTDEM are negative and significant at p <.01 for all three equations. As expected, an organization experiencing declining demand for its primary product or service is more likely to have chosen one of the workforce reduction strategies over the NOREDN option.

In order to further explore the relationship between the variables and the approach to workforce reduction, the partial derivative (that is, the effect of a one-unit change in the variable on the probability of choosing a particular approach to workforce management) for each of the independent variables is provided in Table 4. For example, a one-unit increase in MKTDEM increases the likelihood of choosing the NOREDN strategy by .163 and decreases the likelihood of choosing the MIL- DREDN strategy by .004, the MODREDN strategy by .014, and the SEVREDN strategy by .145. While such information is informative, some caution should be used in interpreting the results (particularly for variables such as MKTDEM, which utilize survey-specific measures).

As hypothesized, organizations introducing new labour-saving technology (TECH) were significantly more likely (p <.01) to have engaged in one of the workforce reduction strategies. As indicated by the partial derivatives, the introduction of new technology decreases the likelihood of opting for the NOREDN strategy by .282 and increases the likelihood of choosing the MIL- DREDN strategy by .015, the MODREDN strategy by .071, and the SEVREDN strategy by .195.

The coefficients on MCHANGE are not significant save for the SEVREDN strategy, where there is strong evidence (p <.01) that a major change in management or strategy is consistent with a severe approach to workforce reduction. As indicated in Table 4, the presence of MCHANGE increases the probability of selecting the SEVREDN approach by .155.

Previous research, although somewhat limited, predicted that larger organizations would be more likely to reduce the workforce but would tend to opt for less severe approaches to workforce reduction. The results of this study are consistent with this hypothesis.

An increase in organization size is strongly related (at p <.01) to the adoption of the MILDREDN strategy. However, the relationship is much weaker (p <. 10) when considering MODREDN, and insignificant with respect to the SEVREDN strategy. Similarly, an examination of the partial derivatives indicates that a one-unit increase in size decreases the probability of choosing the NOREDN strategy by .013 and the SEVREDN strategy by .033, while the likelihood of selecting the MIL- DREDN strategy and the MODREDN strategy is increased by .027 and .018, respectively.

When considering the industry sector of the organization, the results reveal a greater likelihood that organizations in communications and transportation, financial services, health, and education will opt for less severe reduction strategies. Note, in particular, that the coefficients on HEALTH and EDUCN are significant with respect to both MILDREDN and MODREDN, but insignificant when considering SEVREDN.

While TRAIN was only modestly related (p <.lo) to opting for the SEVREDN strategy, there was strong evidence (p <.01) that an organization’s espoused commitment to job security is negatively related to the adoption of more severe workforce reduction methods. The coefficient on EECOMMIT was not significant when comparing NOREDN and MILDREDN; however, it was highly significant with respect to MODREDN and SEVREDN. Consistent with expectations, more severe approaches to workforce reduction are associated with lower levels of espoused commitment to job security. As indicated in Table 4, a one-unit increase in EECOMMIT increases the likelihood of choosing NOREDN by .078 and MILDREDN by .001, while the probability of fol- lowing MODREDN is decreased by .022 and SEVREDN by .057.“ Although the coefficients on UNION were positive, they were not significant using conventional levels of significance. In other words, the union status of the organization was not significantly related to the workforce reduction strategy ~ t i l i zed .~

Conclusions and Discussion

While there is a large and expanding practitioner literature on how to reduce the workforce, much of the work is prescriptive in nature and unsupported by empirical research. The purpose of this study was to empirically examine the determinants of permanent workforce reduction strategies by comparing organizations that have and have not permanently cut back on the number of employees. Several of the major findings warrant additional discussion.

There was a strong relationship between demand for an organization’s primary product or service and the

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Table 4 Partial Derivatives: Probabilties of Workforce Reduction Strategies

Variable NOREDN MILDREDN MODREDN SEVREDN

MKTDEM MCH ANGE MERGER TECH ORGSIZE RETAIL COMMN FINANCE HEALTH EDUCN OTHERSER TRAIN EECOMMIT UNION

0.163

0.023 -0.154

-0.282 -0.013 -0.058 0.055

-0.043 -0.104 -0.115 0.002 0.07 1 0.078

-0.059

-0.004 0.002

-0.032 0.0 15 0.027 0.056 0.121 0.120 0.125 0.110 0.044 0.014 0.001 0.020

-0.014 -0.004 -0.027 0.07 1 0.018 0.036

-0.002 0.008 0.157 0.087 0.054

-0.018 -0.022 0.038

-0.145 0.155 0.036 0.195

-0.033 -0.034 -0.174 -0.085 -0.178 -0.08 1 -0.099 -0.068 -0.057 0.001

workforce reduction strategy employed; as anticipated, decline in demand was associated with a more severe approach to workforce reduction. Although cutting employees may not always be the optimal employer response to declining demand, it is often the approach taken by employers (Perry, 1986). Over the long-term, an employer that responds to changes in demand by cutting the workforce may find that such an approach has several negative implications, such as greater difficulty in recruiting new employees, decreased morale among existing workers, additional training costs, and higher turnover (Cameron et al., 1988).

Nevertheless, organizations facing a declining demand for their product or service are often motivated to cut labour costs. As noted by Cascio (1993), executive decision-makers frequently believe that reducing employees results in lower costs (with costs being more predictable than future revenues). In addition, labour costs are often seen as more amenable to adjustment relative to other expenditures (such as capital investment) incurred by organizations (Adamson & Axmith, 1983). Moreover, organizations seeking to cut costs quickly tend to favour layoffs as opposed to less severe reduction methods (such as attrition or voluntary severance). Still, there were some organizations that drastically reduced the workforce and employed a severe reduction strategy despite increasing demand and a favourable competitive environment. This development, which has also been observed by Tomasko (1990, 1991) and mentioned by human resource managers in personal interviews, may be due to a variety of reasons, including a decision to fol-

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low the lead of other firms engaging in cutback management and an increasing awareness of the need to operate in a “lean and mean” fashion.

There is growing recognition that characteristics of the firm have an effect on numerous aspects of human resource management (Jackson, Schuler, & Rivero, 1989). Specific changes within the organization may be related to workforce reduction behaviour. For instance, the introduction of new labour-saving technology was strongly associated with workforce reduction-the likelihood of choosing a more severe reduction strategy was higher when new technology had been introduced into the workplace. However, only the adoption of a severe reduction strategy was significantly related to a major change in management or corporate strategy.

Organizations facing major change may feel that drastic action is required and thus opt for a more severe reduction strategy. As Cooke (1990b) noted in his study of employee-supervisor relations, a major reduction of the workforce may have a shock effect and actually improve relations between the parties (that is, the parties recognize that the future of the organization is at stake and are shocked into working together more positively).

Consistent with survey findings in the United States (American Management Association, 1987- 1992), larger organizations were more likely to employ a less severe reduction strategy. As organization size increases, there may be more opportunities to transfer people internally (Latack, 1990) and greater resources may be available to pursue less severe but more costly reduction strategies (Adamson & Axmith, 1983). For example, reduction by

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FACTORS AFFECTING PERMANENT WORKFORCE REDUCTION.. WAGAR

early retirement or voluntary severance may involve considerable costs to the organization, and reduction by attrition generally takes a long time. In addition to being a relatively quick way to reduce the workforce, layoffs give the organization greater control in targeting who will be terminated (subject, of course, to collective agreement provisions and legal constraints).

While nonprofit organizations (such as those in the health and education sectors) have traditionally been somewhat immune from large-scale workforce reductions, this trend appears to be shifting dramatically. Health and education are coming under vigorous attack by governments seeking to reduce spending. As indicated in this study, and consistent with the propositions advanced by Greenhalgh et al. (1988) and Latack (1990), organizations in nonprofit industries tended to employ less severe reduction strategies. Whether this pattern continues deserves greater research attention. There was very limited and only modest support for the hypothesis that organizations with a higher commitment to training would employ a less severe reduction strategy-employers opting for the most severe reduction strategy were more likely to have a lower commitment to training, but the relationship was relatively weak (p <.lo). Based on human capital theory, one would expect that as an organization’s investment in the workforce increases there will be less incentive to reduce employment and forego the investment in human capital.

Commitment to job security was highly related to the workforce reduction strategy of the organization; employers opting for a more severe reduction approach were significantly more likely to have a lower expressed commitment to job security. This finding supports the propositions of Greenhalgh et al. (1988) and Latack (1990), who argued that organizations that espouse a concern for the individual try to develop policies aimed at avoiding severe reduction policies.

Greenhalgh et al. asserted that job security provisions in union contracts restrict the attractiveness of permanent workforce reduction policies, while McCune et al. (1988) found that unionization was positively related to the probability of downsizing. In the current study the coefficients on unionization were not significant, indicating that the union status of the organization was not an important determinant of workforce reduction strategy. However, in order to account for the substantial dif- ferences with respect to union-management relations, a more detailed study of workforce reduction behaviour within unionized organizations is required.

While the results of this study provide empirical support for a number of the hypotheses proposed by the- orists, there are limitations to the study. The findings are based on responses of larger Canadian organizations, and as a result the generalizability of the results of the

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study to smaller organizations and the public sector may be limited. In addition, while an overall response rate of 35% is comparable with participation rates obtained in other organization studies, the potential impact of nonre- sponse bias warrants mentioning.

In a survey of the type employed in this study, there is always concern with data that are based on perceptual measures; however, it should be underscored that it is the perceptions of decision-makers that affect behaviour (Greenhalgh et al., 1988). While it would be desirable to obtain responses from a number of individuals within each organization, such an approach is very costly and often not operationally feasible in a large-scale national study; as Cooke (1990a) observed, large-scale surveys necessarily require that details obtained through inten- sive case observation at a given firm are sacrificed in exchange for greater comparability and generalization of less-detailed information across a wide sample of organizations.

There are a number of opportunities for future research. The present study is cross-sectional, and it would be beneficial to obtain longitudinal data on workforce reduction behaviour. In addition, it may be desirable to conduct industry and case studies on a number of related topics, including the nature of the decision-making process relating to the decision to reduce the workforce and the consequences and implications of workforce reduction. Moreover, the relationship between organization performance and workforce reduction behaviour requires additional attention.

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Notes

1. Although not explicitiy developed in the model, organizations could opt for termination without outplacement (a most severe strategy from the perspective of the employee). As noted by Levitt (1992), termination of employees for economic reasons does not constitute just cause for dismissal. To provide an extreme example, an organization reducing 50% of the workforce but only using layoff for 1 % of the reduction would have the same score as an employer who reduced 1% of the workforce and used layoff 50% of the time. In addition to the multinomial logit estimates reported in the paper, probit estimation was used to examine the probability of workforce reduction (that is, did an organization

2.

3.

3 14

downsize or not) and tobit estimation was used to examine the percentage of the workforce reduced (0-100%) and the percentage of the workforce reduced by layoff (0- 100%) for those organizations engaging in permanent workforce reduction. The results of these analyses are generally consistent with those presented in the paper. It may be argued that the workforce reduction strategies (NOREDN, MILDREDN, MODREDN, and SEVREDN) represent ordered choices. Consequently, an estimation using ordered probit was also conducted. The results indicated that the coefficients on MKTDEM, TECH, EECOMMIT, and MCHANGE were in the same direction as the multinomial logit results and highly significant at

Based on suggestions from the reviewers, I also estimated the impact of unionization by substituting the percentage of the workforce unionized for union status and by excluding not-for-profit organizations (those in the education or health sectors). In line with the original findings, the unionization variable was not significant. (There was one exception; UNION was moderately significant, at p <.lo, for MILDREDN when education and health organizations were omitted from the analysis.)

4.

p <.01. 5.


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factors affecting permanent workforce reduction: evidence from large canadian organizations

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