Layoffs often leave companies worse off

Employers these days seem to feel they have plenty of employees — maybe even too many as the economy slows down. That's what's driving layoffs of tens of thousands of workers in tech, banking and other industries.

But executives should be careful about making deep cuts. Because as the last three years have reminded us, having too few workers is almost always worse than having too many. When organisations are shorthanded, morale plunges and profits suffer. And companies often end up investing immense time and effort to rebuild their workforces not long after whittling them down.

"The good companies, whether they're slightly understaffed or slightly overstaffed, if they've got that culture of innovation they will do really well in a recession," says Angie Kamath, dean of the New York University School of Professional Studies. It's less about precise staffing levels and more about factors like product mix and pricing strategy.

A firm that's slightly overstaffed should consider what to do with that capacity rather than panicking and jettisoning people they have worked hard to hire. "The research has been incredibly consistent that layoffs are not good," Kamath warns, ticking off a host of ills from bad PR to increased turnover among remaining employees.

Businesses contemplating job cuts might consider the experience of the retail industry, which for years sought to keep staff levels as lean as possible. Algorithms helped them predict periods of high and low demand and make sure stores had "just enough" staff at those times — in theory, freeing them from having to employ quite as many workers.

Yet focusing so much on optimising worker numbers left stores painfully understaffed during the busiest periods. A 2014 study in the journal Production and Operations Management looked at 41 stores of an (anonymized) large retail chain. The researchers, led by Vidya Mani of University of Virginia's Darden School of Business, found all 41 locations were chronically shorthanded during peak hours. Adding staff during those times would have resulted in an increase in sales and profitability, the researchers concluded.

Having too few workers is almost always worse than having too many Photo: Bloomberg

The problems of understaffing go beyond lost sales, argue Zeynep Ton and Amanda Silver of the Good Jobs Institute, a nonprofit that works with companies in low-wage service industries to simultaneously improve financial performance and job stability.

The work draws from Massachusetts Institute of Technology professor Ton's research that shows, among other things, the perils of being too lean. Understaffing creates waste: When there aren't enough people to move pallets of groceries from trucks to warehouses, the food spoils. It angers customers: When they can't get the help they need quickly, they get fed up and take their business elsewhere. It creates inefficiency: Inventory becomes disorganised, making it tougher for workers to find what they need quickly.

In health care, where staffing levels have been a problem for decades, understaffing can be life-threatening. Studies have linked low staff levels in hospitals to worse outcomes for patients — specifically, in a hospital without enough workers, patients are more likely to contract an infection (because of things like decreased handwashing by frazzled staff). They also are less likely to get the right dose of medication and generally more likely to die. Nurses in such hospitals are more prone to feeling burned out and less inclined to recommend their hospital to friends and family who get sick.

Understaffing isn't always a result of management short-sightedness. Restaurants, harried workplaces in the best of times, have had to shorten their hours — by about 6.4 hours a week in the US compared with 2019 levels — as the pandemic prompted workers to quit.

Regardless of the cause, acute understaffing has a measurable impact on revenue. On a recent vacation to England, I found my favourite pub closed for two weeks — during a peak season — because they were so shorthanded. Never mind that they had already halved the number of diners they were serving. At another eatery, a full-page, single-spaced manifesto posted by the bathroom explained that they had had to stop offering hot food and table service due to a "very difficult staffing situation" intensified by the area's "lack of affordable [or any] housing."

The anonymous writer's stress was palpable. No wonder a pandemic-era study of restaurant workers found a link between being spread too thin and higher levels of heavy drinking. 

Workers can put up with such conditions for only so long. Just look at the strikes we have seen lately by nurses, railroad workers, teachers and baristas. Chief among their demands: Hire more people.

Some bosses doubtless see it differently. They might feel that these workers are just lazy — that "no one wants to work" as the management scholar Kim Kardashian once put it. That's a managerial complaint as old as work itself.

I'm willing to concede the existence of some degree of human laziness. (This is why we invented the remote control, not to mention the bluetooth-enabled electric kettle.) And there are risks to being overstaffed. Workers may feel bored and unchallenged, picking up paychecks but not really engaging. In 2022, we called this "quiet quitting." In the 20th century, scholars termed it "social loafing."

Mild understaffing can keep staff focused and motivated, allowing employees to use a wider variety of skills (something most people find satisfying). But many sectors have gone far beyond being a little short handed — and have for a long time.

Chronic understaffing hurts motivation and, of course, performance. Overstretched staff make mistakes. They disengage. Employees reason that if the company doesn't care enough about its future to hire more people, why should they? They've essentially been set up to fail — and no one enjoys feeling incompetent.

At some point, the work just can't get done, which weighs on the broader economy. There are still 90,000 fewer childcare workers in the US than there were pre-pandemic (when there already weren't enough), making it tougher for parents to take on paid work. A dock worker shortage has contributed to clogged ports and snarled supply chains. A dearth of transit workers is a drag on cities trying to convince remote workers to start commuting again.

That shared pain is worth remembering as companies seek to "right-size" their staff levels. Demand for their services may have slowed, but if they cut too many jobs, it's not only their remaining workers who will pay the price. It's all of us.

Sarah Green Carmichael is an editor with Bloomberg Opinion. She was previously managing editor of ideas and commentary at Barron's, and an executive editor at Harvard Business Review, where she hosted the HBR Ideacast.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.