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Why Layoffs are so Devastating? July 22, 2008

Posted by shaferfinancial in Uncategorized.
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Before 1980, layoffs were virtually unheard of because companies and workers had come to a social compact that recognized the realities of layoffs were bad for both.  I won’t go into the details, but for about a 50 year time period management and workers were able to agree on the issue of layoffs as being bad for everyone, and therefore avoided it at all costs.  Companies like Procter and Gamble and IBM went further and created profit sharing plans that allowed their workers to share the prosperity by being given company stock based on performance and longevity metrics.  In the 1990’s, many of these folks retired with $500,000-$1,000,000 in company stock!  Hence, two generations of workers retired from these companies with large portfolio’s along with lifelong retirement benefits.

However, starting in the 1970’s and rapidly escalating in the 1980’s layoff’s and outsourcing became the main management tool for pumping up stock prices.  Since then, much research has pointed out the damage caused by this behavior to both the worker and the companies.  For industry, layoffs eliminated social capital, stored knowledge that enabled workers to use their experience and familiarity with co-workers to solve problems and increase productivity.  It eliminated the “all-in-this-together” feeling that enabled companies to withstand the vicissitude of the economy.  Companies started treating workers as replaceable parts, only useful for a short shelf-life.  Research has demonstrated that this damaged companies and damaged the bottom line.

However, the real devastation it caused the workers hasn’t really been discussed.  Most workers never reached the pay they received at their old companies and before they find jobs literally use up all of their savings.  Psychologically, it creates a situation where risk is avoided for fear of “another failure.”  Now let me remind folks I am not just talking about the industrial working class here, but also middle and upper management.  In fact, the psychological damage might be worse for them, as their ego was wrapped that much tighter into their educational and occupational attainment.

Layoffs are so common that it is estimated that the average worker will be laid off several times in their career.  Despite the realization that it can and does happen to everyone, those that are laid off, emotionally, see the event as their failure.

I often counsel people who have been laid off.  It is very difficult to get them to take risks, even obvious ones, to break the pattern.  I know I am surprised at this, thinking that folks would do anything to avoid a future layoff and the financial issues it presents.  But, for folks in that situation, they see it much differently, trying to regain self worth by finding another employer that “will value them.”  That is why I get everyone to think in more entrepreneurial ways, even if they have no intention of quiting their job.  The time to get started is when everything is status quo on the job department, before the psychological damage is done.

Sometime people tell me they don’t need a wealth coach because everything is going well for them at work.  Sometimes, they have a defined benefit pension that promises them a fruitful retirement.  But now we are in a situation that private industry has looked to the bankruptcy courts to eliminate those pensions, and even local governments are having issues with meeting those pension obligations.  The future does not look good for even government workers and those defined benefit pensions.  So what is your strategy for the current work environment?  Do you even realize you are a totally replaceable part?  Isn’t it time you start acting like the free agent you really are?  Or are you going to wait for the axe to come down on you?

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Comments»

1. Tom Vanderwell - July 22, 2008

David,

Very well said. As someone who has experienced it before and someone who has seen clients experience it, I can totally agree with your outlook on it.

Tom

2. shaferfinancial - July 22, 2008

I speak from experience myself. How many people empty out their 401K’s after a layoff to survive? How many people become more financially conservative after a layoff, crippling their wealth building? What people don’t understand is how one’s psychological state is the most imporant factor for wealth building.


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