Last Updated 15 Apr 2020

What is the Impact of Downsizing

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As the studies below indicate, layoffs have a number of negative effects not only on workers in different industries, but also on their communities and the market as a whole. Although it has been said that downsizing can be economically beneficial to companies, the following shows that there are two sides to this issue. Over the past decade, the workplace has altered considerably in terms of job stability. People have either experienced layoffs firsthand or directly known someone else who was impacted by re-engineering, downsizing, outsourcing or acquisition.

For employees adversely affected by these changes or for those who do not completely understand why these changes are occurring, the effects can be very disturbing and impact both their personal and job life. A variety of different industries have been impacted by layoffs, not only manufacturing. For example, hospitals like other companies and nonprofit organizations have experienced downsizing that has negatively impacted healthcare employees with varying degrees of psychological distress and poor health.

In a 2002 study, Greenglass, Burke and Fiksenbaum showed that restructuring and its changes can result in lower job satisfaction and job insecurity. The researchers studied the relationship between impact of restructuring, job satisfaction, job insecurity and absenteeism in nurses. The results were similar to earlier studies indicating that job insecurity can often have harmful consequences for individuals. Job insecurity has frequently been reported to lead to decreased psychological well-being (Dekker & Schaufeli, 1995; Ferrie et al. , 1998).

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In a study of Finnish employees, Kinnunen et al. 2000) reported that job insecurity, which led to negative relationships with colleagues and superiors, was still being noted at least one year after the event. The respondents of the Greenglass study, who consisted of 1,363 nurses employed in hospitals that were undergoing extensive restructuring, first filled out a self-report anonymous questionnaire. Results of this study demonstrated that the impact of hospital restructuring had a direct effect on job satisfaction, which in turn then had a pointedly negative impact on absenteeism and on job insecurity.

In addition, the study found that the more the nurses believed hospital restructuring had lowered the quality of health care and had had a negative impact on working conditions, the less likely they were to experience job satisfaction and the more apt to report feelings of job insecurity. Findings further demonstrated that job satisfaction functioned as a intermediary between the impact of restructuring and job insecurity: That is, lower job satisfaction resulting from a greater impact of restructuring led to decreased job security. The impact of restructuring also placed an indirect effect on absenteeism through job satisfaction.

The lower the job satisfaction, resulting from restructuring, the more likely the nurses were to be miss work. These results were similar to prior studies that linked layoffs with an increased amount of job insecurity. Campbell-Jamieson, Worrall, & Cooper (2001), for instance, compared responses from managers in three different business settings: organizations that restructured and downsized in the previous year, those firms that restructured without downsizing, and companies that had not restructured. Managers in organizations that had downsized had less job security, lower organizational commitment and reduced morale.

Research has also demonstrated that reorganization can lead to greater emotional turmoil, including such feelings as anger, anxiety, cynicism and resentment (O'Neill & Lenn, 1995). Burke & Nelson (1997) found that this is most likely the result of a variety of negative observations throughout the restructuring, such as the belief that workers were treated unfairly, the psychological contract was eroded, and future employment would be insecure. The findings by Greenglass additionally showed that the restructuring impacts job insecurity in both direct and indirect ways.

In other words, an effect of downsizing is lower satisfaction with one's job. This is most probably the result of disillusionment as well as feelings of being let down by the company and uncertainty about one's employment in the future. Decreased job satisfaction then leads to lower job security. The researchers do note, however, that these increased feelings of disillusionment and decreased feelings of job satisfaction and job security can be reduced if the organization's administration does its best to offer support, information sharing, and input into decision-making.

To the degree that healthcare workers believe they are important to the hospital and that the institution cares about them and their opinions, the effects of restructuring can be considerably decreased. The impact of downsizing on workers is a combination of both the psychological and physical. Kivimaki et. al (2000) conducted a study to explore the underlying mechanisms between organizational downsizing and deterioration of health of employees. He found negative changes in work are associated with the declining support from aspouse, and increased prevalence of smoking.

Sickness absence rate from all causes was 2. 17 times higher after major downsizing than after minor downsizing. Adjustment for changes in work, for instance, physical demands, job control, and job insecurity, diminished the linkages between downsizing and sickness absence by 49 percent. Adjustments for impaired social support or increased smoking did not change the relationship between downsizing and absence from illness. Such conclusions were unaffected by sex and income.

Kivimaki concluded that the exploration of potential mediating issues offers new knowledge concerning the possible causal pathways connecting organizational downsizing and health. Downsizing results in changes in work, social relationships, and health-related behaviors. The noticeable increase in certificated sickness absence was partially explained by simultaneous increases in physical demands and job insecurity and a decline in job control. A reduction of employees leads to a number of negative effects; the closing of an entire plant or business can even result in greater problems.

The recent economic history of Cleveland County, North Carolina, has been distinguished by factory closings, business layoffs, and significant unemployment rates. More than 3,500 workers have lost their jobs in this area in the last four years. This, in fact, may even be an underestimation, since it applies to events that involve 50 or more workers at a time. Many other smaller firms have fired workers as well. Such numbers are extremely significant since the county's labor force only numbered around 42,000 workers to begin with.

Layoffs have been devastating to workers and their families. In the very best cases, unemployed workers were able to find other work, but normally there was a temporary loss of income and a reduction in pay. In the worst situations, these workers remained unemployed forever, either because they lacked the necessary skills for available jobs or believed themselves too old to move or go back to school. In such situations, economic dislocation also creates problems for the greater community.

When unemployment rates rise, there is an increased demand for services at a time when communities are experiencing sharp declines in tax income. These decreases often result in poorer quality education, a deteriorating infrastructure, and larger welfare rolls, which make it more difficult to attract new businesses to the area. Thus, it is not always just the employees who are impacted when there is restructuring. A literature review of downsizing studies by Farrell (2000) also showed the connection between downsizing and the impact on market orientation.

Specifically, his report gave evidence that (1) trust and commitment are keys to understanding the exchanges between a company and its workers; (2) the form of restructuring strategy will impact upon the degree of trust between personnel and senior management (Mishra and Mishra 1994) and will also directly effect the firm's market orientation; (3) the type of downsizing strategy and trust level will directly impact worker commitment to the firm's goals of creating high-quality customer value; and (4) employee commitment to such company values will impact the level of market orientation (Narver, Slater and Tietje 1998).

Survivors of downsizing are impacted as well, as seen in a number of studies. In a longitudinal study, Moore, Grunberg and Greenberg compared 1,244 white- and blue-collar workers who recalled either zero, one, or two exposures with layoffs; all participants were personnel of a major industrial company that had had several large episodes of layoffs.

They found that employees with the greatest number of contacts with downsizing both direct, or personally targeted, and indirect, coworkers laid off, noted considerably lower levels of job security and higher levels of role ambiguity, desire to leave their jobs, depression and health concerns. Contrary to what some others had thought, their findings did not support the notion that workers more quickly recover as they encounter a larger number of downsizing episodes.

They also found only partial evidence that the similarity-that is, either repeated direct or repeated indirect layoff contact--or dissimilarity-that is, a combination of direct and indirect contacts--of the form of repeated downsizing exposure played a role in the amount to which personnel noted changes in outcome variables. Similarly, Masi (2000) looked at several pervasive ideas: First, that negative effects on the employees' morale who have survived downsizing may be so harmful to overall productivity that they overshadow any immediate economic gains the workforce reductions may bring.

Second, those managers who are capable of eliciting trust and organizational commitment among employees as well as generally good labor relations may largely reduce or even eliminate the possible ill-effects of downsizing. Third, is it true as a number of political economists who are critical of the free-market model in the U. S. have argued that a crucial factor in helping reduce the fears and anxieties caused by industrial layoffs is the degree of employment and/or income security available to employees outside their current place of work?

Fourth, recent research concerning the presence of unions suggests that the overall character of the industrial relations system will strengthen or weaken the negative effects of downsizing. In his article, Masi reported findings from a Swedish-Canadian comparison of blue-collar manufacturing workers who had been exposed to various kinds of change, including downsizing. The results provided strong support for the belief that experience with layoffs has a strong negative impact on survivor concerns everywhere.

Simultaneously, there is also some evidence supporting that the amount of externally provided security has some mitigating effect on survivor worries, and the presence of unions within a strongly adversarial system of labor relations can increase such concerns. However, the quality of labor-management does not seem to have much of a helpful effect on the negative impact of downsizing. In the future, as downsizing continues, additional studies will have to be conducted to determine long-range impacts on individuals, their families, communities and the economy as a whole.

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