Downsizing Essay

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Downsizing refers to the reduction of employees in a business enterprise for economic or business reasons. In contrast to being fired, to be downsized is usually not strictly related to personal performance but rather to economic cycles or a company’s need to restructure itself. Eliminating a downsized employee’s job and not refilling it occurs because the company wishes to reduce its size or operations, not because the employee failed to perform. Downsizing is a permanent or large-scale workforce reduction and is distinguished from a layoff, which typically is a more individualized or temporary job loss. A “mass layoff’ implies laying off a large number of workers and is similar to downsizing. A plant closing or relocation, in contrast to downsizing with the elimination of some positions and the retention of others, occurs when the entire workforce, at least at a particular location, is eliminated.

Industrial “restructuring,” that is, job churning rather than net job reductions, or change in composition rather than change in size, is what occurs in many circumstances broadly termed downsizing. In fact, while the manufacturing industry has experienced significant downsizing, nonmanufacturing industries, even in the midst of large-scale downsizing, have experienced significant “upsizing” in terms of actual net company size. Nevertheless, both downsizing and restructuring entail individual job termination. Downsizing is one cause of worker displacement, a comprehensive term that refers to all forms of involuntary job loss that result from economic and business conditions largely beyond the control of the individual worker, including downsizing and restructuring, layoffs, and closing or relocating plants.

Rightsizing is downsizing accompanied by the firm belief that a given enterprise should operate with fewer people. Some contention exists that downsizing has become too closely associated with the process of organizational decline and that downsizing can be a purposive strategy, undertaken and designed to improve organizational efficiency, productivity, and competitiveness. Downsizing thus defined falls into the category of management tools for achieving desired change, like rightsizing or “reengineering.”

Further Definitional Issues

The narrowest definitions of worker displacement include the points that (a) the workers have been displaced as the result of a structural cause, including but not limited to international trade, technology, and government regulations, rather than due to cyclical downtown or economically motivated firm-specific idiosyncrasies and (b) the workers are firmly attached to the sector in which they were employed and have a limited ability to return to a comparable job in a reasonable time span. Empirical research, however, rarely uses these narrow criteria.

The distinction between voluntary quits and involuntary displacement is not always clear-cut. Firms may wish to reduce costs without downsizing workers and may reduce or fail to increase wages. This may prompt some workers, presumably those with less job loss risk-aversion, to quit, whereas other workers, presumably those workers with more job loss risk-aversion, may choose to work for lower wages.

Data Sources

The Mass Layoff Statistics program of the U.S. Department of Labor’s Bureau of Labor Statistics collects reports on mass layoff actions that result in worker-job separations. Monthly mass layoff numbers come from establishments that have at least 50 initial claims for unemployment insurance filed against them during a 5-week period.

Since 1984, the Employment and Training Administration of the U.S. Department of Labor has sponsored the Displaced Worker Surveys (DWSs) that collect information on workers who were displaced from their jobs. The DWSs are conducted biennially as supplements to the Current Population Survey, a monthly survey of households that is the primary source of information on the nation’s labor force. The DWS defines displacement as an involuntary job separation based on operating decisions of the employer, such as a plant closing, an employer going out of business, or a downsizing or layoff from which the worker was not recalled. DWS data have the benefit of a large sample of displaced workers. But DWS data suffer from several limitations; most important, the data are cross-sectional, making it difficult to study causal relationships.

The most widely used longitudinal data in empirical studies of downsized workers come from the Panel Study of Income Dynamics and the National Longitudinal Surveys. The primary advantage of longitudinal data is that they allow the construction of comparison groups; the primary disadvantage is the small sample sizes relative to the DWS. Other data sources on downsized workers include regional data, data from administrative sources on workers and their firms, and case studies of plant closings. These data are rich in detail and narrative but tend not to generate a representative portrait of the broader experience of downsizing.

Downsizing Effects on Workers

Roughly 2 million workers a year were displaced in the early 1990s from jobs that they held for at least 3 years. According to the Bureau of Labor Statistics, during the January 2001 through December 2003 period, another 5.3 million workers were displaced from jobs they held for at least 3 years. With the tenure restrictions relaxed, the number is significantly larger. Other data show an increase over the past 3 decades in downsizings, plant closings, and layoffs that is independent of the business cycle.

Downsizing correlates with serious career losses for workers. The most reliable estimates indicate that the average displaced worker experiences a substantial period of nonemployment, a period that lasts longer during recessions than expansions. The length of nonemployment has a high degree of variance; some workers experience rapid reemployment at comparable (or improved) pay, whereas others experience prolonged periods of unemployment or reemployment at reduced wages. Researchers also found an increased probability of part-time employment following displacement. Substantial earnings losses are also incurred, and these generally are more persistent than nonemployment effects. The degree to which displaced workers suffer earnings losses is cyclical. Moreover, labor market conditions in a downsized worker’s industry and local area conditions are important factors in the extent to which downsized workers suffer earnings losses. Some studies also found that downsized workers experience declines in other properties of jobs that signal quality, such as occupational status, job authority and autonomy, and employer-offered benefits.

The risk of being downsized varies along a number of dimensions that in turn condition the extent to which the event damages a worker’s career. First, men are more likely to be downsized than women, although debate persists over the question of whether men or women experience greater losses following displacement. Second, studies find that less educated workers are more likely to lose a job due to downsizing than are more educated workers, spend more time unemployed, and suffer the greatest wage losses. Third, the risk of job loss and transition difficulties corresponds to occupation: Semiskilled, blue-collar workers disproportionately endure long-term unemployment and the largest earnings reductions. However, as the incidence of downsizing events for more educated and white-collar workers increases, the transition difficulties for such workers increase as well.

Some theories of why workers are downsized and unable to replace lost jobs with comparable reemployment include (a) technological innovation and the structural transformation of manufacturing; (b) foreign competition, including international trade and the pressure that low-wage labor abroad puts on U.S. labor markets; (c) a shift in consumer spending from goods to services; (d) a weakening of labor unions; and (e) a change in the social contract between labor and capital such that workers are seen as costs that need to be minimized in an effort to increase profits.

Policy Response

The unemployment insurance system, although not directly targeted at downsized workers, is the most consequential policy effort. One policy targeted at displaced workers is the Worker Adjustment Retraining Notification (WARN) Act, which requires employers to provide 60 days notice of a plant closing or mass layoff. The Trade Adjustment Assistance Act, originally enacted by Congress in 1962, provides income replacement support above levels provided by unemployment insurance, targeting workers downsized from jobs as a result of the relaxation of trade restrictions. The 1994 North American Free Trade Agreement Transitional Adjustment Assistance Program also is a response to concerns about job loss following trade liberalization; it provides income replacement and reemployment services. The Job Training and Partnership Act, amended in 1988 as the Economic Dislocation and Worker Adjustment Assistance Act, provides job search assistance and retraining. Research on existing training programs shows no clear evidence that such programs provide many benefits to downsized workers. Also, programs have generally failed to address the most critical component of worker’s costs: earnings losses after reemployment.


  1. Addison, John T., ed. 1991. Job Displacement: Consequences and Implications for Policy. Detroit, MI: Wayne State University Press.
  2. Bernhardt, Annette, Martina Morris, Mark S. Handcock, and Marc A. Scott. 2001. Divergent Paths: Economic Mobility in the New American Labor Market. New York: Russell Sage.
  3. Bluestone, Barry and Bennett Harrison. 1982. The Deindustrialization of America: Plant Closings, Community Abandonment, and the Dismantling of Basic Industry. New York: Basic Books.
  4. Fallick, Bruce. 1996. “A Review of the Recent Empirical Literature on Displaced Workers.” Industrial and Labor Relations Review 50:5-16.
  5. Farber, Henry S. 2005. What Do We Know about Job Loss in the United States? Evidence from the Displaced Worker Survey, 1984-2004. Working Paper No. 498. Princeton, NJ: Princeton University, Industrial Relations Section.
  6. Newman, Katherine S. 1999. Falling from Grace: The Experience of Downward Mobility in the American Middle Class. Berkeley, CA: University of California Press.

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