Downsizing
The economy was strong, inflation was falling, and real GNP was growing at a steady, confident pace. Corporate profits had reached historically high
levels, and investors were on a buying spree in the stock market, pushing it from one record close to the next. Unemployment had fallen to a level that
many economists felt was consistent with non-accelerating inflation. Expectations of inflation were abated, and the boom seemed to be poised to last
for a long time, with no economic downturn in sight. At the same time, the major corporations in the US appeared to be firing workers by the
hundreds of thousands, and job insecurity had risen to a surprisingly high level. Regardless of seniority, the company's profitability, or the surging
demand for the firm's outputs, the threat to an employee of finding a pink slip in the next pay envelope was real and widespread. No job seemed safe.
The above statements, describing the US economy in the mid 1990s, seem inconsistent not only with a standard textbook characterization of an
economic boom, but also with any historically observable relationship between the labor market and other economic arenas, such as the financial market
or the goods market. Politicians and unions pointed to the greed of corporate America, and the insensitivity of management to the contributions and
value of workers. Standard microeconomics was at a complete loss to explain the phenomenon. If strong firms were anticipating a greater demand for
their products during the economic boom, and labor costs were not rising excessively relative to productivity, why were firms firing workers? The term
"downsizing" was coined to describe the action of dismissing a large portion of a firm's workforce in a very short period of time, particularly when the
firm was highly profitable.
In a standard downsizing story, a profitable firm well-poised for growth would announce that it was firing a large percentage of its workforce. The
equity market would get excited, and...
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