Swinging the Axe

Job-cutting has begun in earnest. But will the axe be wielded wisely?

The headlines screamed that January 26th was “Black Monday” for jobs, after firms such as Caterpillar, Corus, Home Depot, ING, Pfizer and Sprint Nextel announced cuts of several thousand jobs each, due mostly to the rapidly deteriorating global economy. Alas, the consensus among the corporate bigwigs gathered this week at the World Economic Forum in Davos was that this marked only the beginning of the axe-swinging, and that there are blacker days to come.

This proved to be one of the big points of difference between the company bosses and the politicians brainstorming in the mountains. The politicians are primarily concerned with restoring demand enough to reverse the rising trend in unemployment; for many of the corporate leaders, ensuring the survival of their firms takes precedence over saving jobs. The difficult decision they face is not whether to cut, but how to do so in a way that strengthens their competitive position in the medium term rather than seriously damaging it.

The gloomy mood among bosses in Davos makes the worst-case scenario outlined in a new forecast from the International Labour Organisation (ILO) seem the most plausible of its possible outcomes. This supposes that if every economy in the developed world performs as it did in its worst year for unemployment since 1991, and every other economy performs half as badly as in its worst year, then the global jobless rate will rise to 7.1 percent this year-some 230 million people, up from 179 million in 2007.

The ILO’s most optimistic prediction is that global unemployment will rise only to 6.1 percent (from 6 percent in 2008). But that assumes that the world economy performs as the IMF forecast in November: global GDP growth of 2.2 percent in 2009, with a slight recession in the developed economies. The IMF has since become much glummer: this week it forecast growth of just 0.5 percent.

Already, firms are starting to find that their first round of cuts after the onset of the crisis is not enough. Caterpillar’s latest cut of 5,000 jobs is in addition to 15,000 already announced. Such is the frenzy of cutting that Challenger, Gray & Christmas, a recruitment firm that tracks employment trends in America, sought a crumb of comfort in its finding that over 50 percent of firms have cut jobs: it proclaimed in its latest report that “nearly half of employers avoid lay-offs.” But it pointed out that things would be even worse without the various innovative schemes adopted by companies to reduce labour costs without shedding jobs. These include salary cuts, reduced hours and “forced vacations”.

As Challenger suggests, this seems in keeping with the suggestion by Barack Obama in his inauguration speech that people should “cut their hours [rather] than see a friend lose a job.” Already, by way of example, White House staff earning $100,000 or more have had their salaries frozen. Companies including Avis, Starbucks and Yahoo! have announced pay freezes for 2009.

Yet these creative job-saving schemes are unlikely to go anywhere near as far as Mr. Obama would like. They may appeal as a way to buy some time as companies try to get a clearer picture of where the economy is heading, or to retain talented workers who are likely to be needed in the future, if not now. But they have little appeal once a firm has decided that it needs to scale back its operations. As the boss of a big American retailer put it privately at Davos, “We have to decide who we want on the bus and to motivate them as much as possible.” Clever ways to share the pain can demotivate everyone, especially if they are seen as merely postponing the inevitable job cuts, making everyone fearful.

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