The Vicious Cycle of Competitive Unemployment - Essay Example

?Introduction Globalisation and downsizing are some of the most popular practices in the contemporary global economies. The growing competition in the global market has jolted contemporary companies to adopt the practices in their strategic plans to enhance their competitive edge. Consequently, both developed and developing economies have experienced diverse effects on their social economic status because of implementation of these policies. In spite of the apparent adverse effects of downsizing and globalisation, corporations are widely applying these strategies. This paper evaluates the reasons why downsizing and globalisation are widely applied in companies and the effects of the strategies on social economic status of developed economies. Downsizing news in companies usually creates a sensation in the media and in the public domain mainly because of the perceptions about the financial status of the affected company and the economic effects of the strategy1. From an economic perspective, downsizing is considered as a short-term measure and the company’s management is usually accused of undertaking mass redundancy without reasonable economic need. Mass dismissal of employees is a common strategy that managers take in order to enhance the economic status of the organisation on the stock market and enhance the image of the company to the shareholders for a brief period 2. The rationale for downsizing has been a subject to numerous economic studies for a long time and has undergone metamorphosis for the past decades. 1S. Abraham, and Kim, D. “Layoffs and employment guarantee announcement: How do shareholders respond?” International Journal of manpower, 25(8)2004, pp 726-739. 2ibid p727 In the 1980’s for instance, companies management emphasised on reducing the size of production units, increasing their efficiency and enhancing their ability to adapt to the dynamics of the market3. Business leaders justified downsizing, by arguing that it was necessary to scale down the size of workforce into the right size that would serve the interests of the company better4. Downsizing has various impacts on developed economies but before examining its effects, it is important to consider the facts that prompt companies to dismiss employees. Downsizing in companies is informed by two factors, namely reactive or defensive and proactive or offensive strategies5. Reactive or defensive downsizing arises from several factors, key among them the poor financial performance. Poor financial performance of a firm is one of the factors contributing to a decline in demand of its products. Dismal financial performance could be caused by unsuccessful commercial approach, overproduction and loss of competitive edge, especially when the company experiences high production costs, rendering the prices of the final product costly and uncompetitive6. Other factors that could contribute to a decline in the demand of the company include a consistent decline in growth of the firm7. In such situation, downsizing is applied as a pre-emptive strategy to cushion the company from anticipated financial collapse. For the past decades, various companies in developed countries have undergone restructuring process in order to enhance their productivity and profitability. 3S.Abraham, and Kim, D. “Layoffs and employment guarantee announcement: How do shareholders respond?” International Journal of manpower, 25(8)2004, pp 726-739. 4Chalos, P., and Chen, C. Employee Downsizing Strategies: Market Reaction and Post Announcement Financial Performance. Journal of Business Finance and Accounting, 29(5/6), 2002, pp845-870. 5 ibid p847 6ibid p853 7ibidp859 During the restructuring process, some departments are considered untenable, resulting to dismissal of the affected units8. This kind of downsizing referred, as “proactive layoff” has been particularly prevalent in the last two decades, mainly because of increasing adoption of information and technology9. Thus, some occupations previously undertaken by human labour are conducted cheaply and more efficiently by various computer applications. Besides increased adoption of technology, companies in developed countries have implemented other cost cutting measures, by outsourcing various segments of their businesses to third parties. Raj and Forsyth listed four situations that initiate layoffs instigated by restructuring. The first situation occurs when the firm does not intend to initiate drastic reductions of the payroll10. The second event is in situations when the company seeks to enhance the efficiency of its internal communication channels, by eliminating or streamlining the existing systems to ensure speedy decision-making11. Therefore, some departments and positions that undertake similar roles could be merged leading to reduction in the number of the management positions available in a firm. Thirdly, companies with diversified sectors often restructure to concentrate on the more profitable and economically viable segments, resulting to the closure of unviable sectors leading to loss of jobs. The final situation that has led to offensive restructuring includes the need to reduce the cost of producing the company’s goods and services12. 8 B, Blackburn. “The Vicious Cycle of Competitive Unemployment”. International Journal of Sociology and Social Policy, 119(1/2) 1999, pp 1-26 9M, Raj, and Forsyth, M. “The Efficiency and Productivity Implications of Corporate Layoffs”. Economic Issues, 7(2), 2002, pp 59-69. 10 ibid, p60 11ibid, p61 12ibid, p62 In developed countries, strategies of reducing the cost of production in companies includes relocation of labour intensive segments to countries with cheaper sources of labour13. Downsizing has various implications on the social economic status of the developed countries. The immediate impact of downsizing befalls the affected company, which incurs heavy expenses in settlement and compensating the affected employees. Some of the direct costs of downsizing include disruption of the normal operations in the company due to restructuring, hiring and training new employees and settling financial obligations owed to the retrenched workers. In addition, downsizing has negative impacts on the mental health of the remaining employees, which undermines their motivation and productivity in the workplace14. Baumol, Blinder, and Wolff noted that the retained employees consider the redundancy process as a breach of employee- employer contractual agreement15. Thus, the employees do not only lose confidence in the firm but also constantly live in fear of being laid off before the terms of their contract expires. Downsizing in developed countries increases the tensions between the company on one side and employees and trade unions on the other16. These tensions adversely affect the image of the company in the public, which undermines its ability to attract and retain highly skilled professionals for a considerable time. Therefore, to the working force, downsizing increases their job insecurities and dissatisfaction, lowers the morale and increases feelings of resentment toward the management, which ultimately results to decreased dedication to the employer and other adverse psychological effects such as stress. The eventual consequence is declining productivity, which further increases the direct cost of downsizing. 13 J., Scholte,. Globalization: A Critical Introduction. London: Palgrave, 2005, pp152-169 14 W, Baumol, Blinder, and Wolff. Downsizing in America: Reality, Causes and Consequences. New York: Russell Sage Foundation, 2003 pp67-106 15, 16 ibid, pp72-75 Downsizing in developed countries is usually accompanied by costly and lengthy litigations that disrupt normal operations of the company in addition to increasing the costs of production. Most developed countries including United Kingdom provide the affected employees with legal recourse to sue the employer for damages associated with the job loss. Usually, the legal institutions support lay-off plans offered by the employers to the affected workers. However, the affected employees sometimes challenge the plans and contend their dismissal on various irregularities committed by the employer17. In situations where such employees win their cases in courts, the employer is compelled to settle heavy fines, which increases the cost of downsizing further. In situation of mass redundancies, it is common for the employees and the employer to engage in negotiations to settle the issue amicably for the interests of both parties. However, social disputes often occur in situations where the consultations fail to reach an amicable settlement. Such disputes adversely affect the financial position of the company and its various stakeholders. Chalos estimated that social disputes involving about 1000 employees could cost the company about $ 80 million18. However, damaging the firm’s public image is one of the most damaging consequences of downsizing especially in developed countries. The huge media attentions that accompany the downsizing expose the companies to wide publicity, which destroys its brand image and the subsequent profitability. In developed countries, such as the United States, there is a growing trend where the disgruntled employees contact media houses once they perceive their jobs are at risks in order to reach the public and convince them to shun dealings with the disputed company19. 17P., Chalos, and Chen, C. Employee Downsizing Strategies: Market Reaction and Post Announcement Financial Performance. Journal of Business Finance and Accounting, 29(5/6), 2002, pp845-870. 18 ibid, p860 19 ibid, p864 Downsizing affects the perception of the firm’s shareholders, especially in regards to its financial stability and projected future performance. This adversely affects the company’s performance in the financial markets. The performance of a company in the financial markets directly relies on its financial stability and consequently, news about downsizing elicits distinct responses, depending on how the exercise is conducted. Companies that downsize as a strategy of restructuring but have sound financial power are more likely to elicit a positive response than those that downsize because of financial instability20. Restructuring is perceived in financial market as an effective technique to enhance effectiveness and profitability, an aspect called “pure efficiency hypothesis”21. Downsizing plans motivated by the financial instability is interpreted as an indicator of future decline in projected growth and profitability of the company, a hypothesis referred as “investment decline” in the financial markets. To the company’s shareholders, lay off plans that intend to enhance the profitability of their investments initiate an increase in price of the firms stocks in the financial markets. This reaction is particularly evident when majority of the shareholders are persuaded that the retrenchment exercise is for their own benefits22. Scholte defines globalisation as the change of social geography that is characterised by development of supraterritorial spaces. However, globalisation process does not involve the termination of territorial boundaries but different countries interact with one another in intricate relationships23. 20 M, Raj, and Forsyth, M. “The Efficiency and Productivity Implications of Corporate Layoffs”. Economic Issues, 7(2), 2002, pp 59-69 21ibid, p65 22 ibid p66 23J., Scholte,. Globalization: A Critical Introduction. London: Palgrave, 2005, p8 Various definitions of globalisation have been put forward but there is no universal consensus on the ideal definition. However, globalization is evidenced by increased mobility and integration of labour, services, goods, capital and technology across different international boundaries in the world24. As companies embrace globalization, the strategy has caused various impacts in the globe. These include increasing levels of unemployment and the widening income disparity between the highly skilled and lowly skilled workforce25. Before investigating factors contributing to increasing adoption of globalisation in companies located in the developed countries, it is important to examine the various impacts of the phenomenon in the global economies. In developed economies, the effects of globalizations have become increasingly apparent since the 1970’s. An increase in the ratio of trade to output provided the impetus to globalisation, which has reached phenomenal proportions in the current global economy26. Developed countries have experienced high level of market globalisation because of rapid increase in the proportion of their exports to the cumulative production. However, unlike developing countries which mainly produce agricultural products, non-tradable services comprise the largest proportion of production in developed economies. Some of the services include technology, finance, wholesale and retail trade in addition to investment in housing sectors among others27. Since production in developed countries is mainly oriented to service industry, globalisation has affected various sectors immensely. The labour market is possibly is one of the most affected sector in developed countries. 24M, Slaughter, and Swagel, P. “Does globalisation lower wages and export jobs?” International Monetary Fund. September 1997, assessed 28 April 2012, http://www.imf.org/external/pubs/ft/issues11/issue11.pdf 25-27 ibid, pp 1-5 According to Granter, globalisation has opened access to low cost labour to everyone28. In the developed countries, the pursuit of cheap labour has resulted to the export of jobs to developing and other poor countries where low cost labour is readily available. The rationale for exporting jobs to poor and less developed countries is to increase profit margin, because employees in developing world can afford to work with low compensation. Critics of job export phenomenon argue that it has contributed to the increasing rate of unemployment in developed countries. This is evident in various sectors, which employ large numbers of unskilled and/or semiskilled workers, such as the manufacturing segment. Thus, one of the effects of globalisation on the labour market in developed countries is loss of job opportunities among the low skilled workers. In this respect, adoption of technology, which is one of the major drivers of globalisation, contributes to loss of jobs especially in low skilled segment of the workforce29. Although the subsequent layoffs are temporary, it is a major source of economic and social concern because the job losses are usually concentrated in a particular sector and geographical location30. Therefore, increased adoption of technology in organizational operations and exporting jobs is a major threat to unskilled employees in the developed economies. Low skilled labour is still essential in the growing service industry and ventures that cannot be relocated in poor and developing countries31. However, the increasing vulnerability of this segment to unemployment has initiated several initiatives aimed at cushioning low skilled workers from the effects of joblessness. Some of the initiatives include training and equipping the workers with skills needed in the contemporary labour market32. 28E.,Granter. Critical Social Theory and the End of Work. Farnham: Ashgate Publishing, 2009, pp165-170 29 ibid, p 168 30 ibid, p170 31-32 ibid, pp165-169 Companies that cannot relocate their operations or adopt technology resort to various malpractices to acquire labour force, such as importing workers from poor countries, a situation that has resulted to a decline in compensation or wages provided to the particular job in the developed countries. The increasing shift from low skilled to more skilled labour in developed countries has resulted to a widening income disparity between these two groups of employees in the society33. In United States for instance, the compensation of low skilled employees has been on a declining trend for the last four decades. The average wage for low skilled high school graduate has declined by about 20 percent and that of skilled workers has increased marginally during the period in the country34. Although this trend is not applicable in all developed countries, the difference in wages between low skilled and skilled workers is evident. The decline in wages among the low skilled employees is due to the declining demand for their services. This is common in countries with decentralized labour framework such as United Kingdom and the United States35. Various research studies have been undertaken to investigate the role that globalization plays in reducing average wages for low skilled employees. Hassard, et al attributed the declining wage to the low costs of imports and large volumes of imported commodities. Market liberalisation is one of the fundamentals of globalization, a principle that has resulted to an increase in the volumes of imports in the international market. Large volumes of imports lower the prices of commodities in the market, which results to a decline for wages paid to employees36. 33M, Slaughter, and Swagel, P. “Does globalisation lower wages and export jobs?” International Monetary Fund. September 1997, assessed 28 April 2012, http://www.imf.org/external/pubs/ft/issues11/issue11.pdf 34ibid 35 , J., Hassard, et al. Managing in the Modern Corporation. Cambridge: Cambridge University Press, pp1-227. 36 ibid, The reduction in wages is not a direct response to the low priced imported commodities, but a decline in demand of their services as employers shift their focus to ventures that are more profitable37. In countries with high cost of production, imports from regions that manage to produce the same commodity at relatively lower prices reduce the demand for locally produced commodities in the competitive market. Capital flow is another factor that results to reduction in the cost of labour. In developed countries, globalisation has increased the amount of capital flowing from the countries to other developing and poor nations across the world. The capital flight from the developed states occurs as the multinational companies in these countries establish subsidiaries in foreign markets, to profit from relatively low cost of labour in the destinations38. Consequently, skilled labour is outsourced to these subsidiaries, resulting to reduction in the number of employment opportunities for low skilled workers in developed countries. Another impact of globalisation in developed countries is the movement of labour from poor countries into the advanced economies. Due to the deplorable economic state of most developing countries, workers are increasingly immigrating into developed countries in search of employment opportunities39. The immigration has various social economic impacts on the host country. One of the major effects of immigration includes reducing the cost of labour of the low skilled workers in the developed countries. In United States for instance, the high number of immigrants has resulted to a decline in the cost of labour resulting to an increase of income disparity between the skilled and low skilled employees40. This phenomenon is prevalent in other developed countries in European continent. 37M, Slaughter, and Swagel, P. “Does globalisation lower wages and export jobs?” International Monetary Fund. September 1997, assessed 28 April 2012, http://www.imf.org/external/pubs/ft/issues11/issue11.pdf 38-40 ibid The resulting decline in the cost of labour results to an increasing rate of unemployment among the residents of the developed country, because companies prefer engaging cheap labour from immigrants in the available employment opportunities. Conclusion Globalisation strategy is widely applied by companies in order to enhance their competitiveness and profitability in the liberalised global market. To ensure the companies reap the maximum benefits of globalisation, the need to have a flexible and affordable labour force, with greater efficiency and productivity has become of paramount importance. Consequently, companies in developed countries have shifted their focus from low skilled to skilled labour in the service sector, resulting to high unemployment levels. In developed countries, the situation is worsened by flow of capital into developing countries and increasing number of immigrants. In order to meet the demands of globalisation, companies in developed countries are restructuring leading to further loss of jobs. The major effects of globalisation and downsizing are massive job losses and declining costs of labour in developed countries. Consequently, the income disparity between the low skilled and skilled employees continues to widen. This has resulted to high poverty levels, and declining costs of living in geographical regions affected by the high unemployment levels. The growing number of informal settlements, ghettos and number of people depending on incapacity benefits in Britain demonstrates the adverse effects of downsizing and globalisation in the contemporary society41. 41The Independent. “Hidden in plain sight: How the needs of the poor are being ignored”. Thursday 5 may 2011, viewed on 29 April 2012, http://www.independent.co.uk/news/uk/politics/hidden-in-plain-sight-how-the-needs-of-the-poor-are-being-ignored-2278989.html Bibliography Abraham, S., and Kim, D. “Layoffs and employment guarantee announcement: How do shareholders respond?” International Journal of manpower, 25(8)2004, pp 726-739. Baumol, W., Blinder, A., and Wolff. Downsizing in America: Reality, Causes and Consequences. New York: Russell Sage Foundation, 2003. Blackburn, B. “The Vicious Cycle of Competitive Unemployment”. International Journal of Sociology and Social Policy, 119(1/2) 1999, pp 1-26. Chalos, P., and Chen, C. Employee Downsizing Strategies: Market Reaction and Post Announcement Financial Performance. Journal of Business Finance and Accounting, 29(5/6), 2002, pp845-870. Granter, E. Critical Social Theory and the End of Work. Farnham: Ashgate Publishing, 2009. Hassard, J., et al. Managing in the Modern Corporation. Cambridge: Cambridge University Press, 2009. Raj, M., and Forsyth, M. “The Efficiency and Productivity Implications of Corporate Layoffs”. Economic Issues, 7(2), 2002, pp59-69. Scholte, J. Globalization: A Critical Introduction. London: Palgrave, 2005. Slaughter, M., and Swagel, P. “Does globalisation lower wages and export jobs?” International Monetary Fund. September 1997, assessed 28 April 2012, http://www.imf.org/external/pubs/ft/issues11/issue11.pdf The Independent. “Hidden in plain sight: How the needs of the poor are being ignored”. Thursday 5 may 2011, viewed on 29 April 2012, http://www.independent.co.uk/news/uk/politics/hidden-in-plain-sight-how-the-needs-of- the-poor-are-being-ignored-2278989.html Read More