Negative Effects of Layoffs

Sophomore (College 2nd year) ・English ・MLA ・3 Sources

Any type of layoff is bad for a worker and the company as a whole. It makes no difference if a single employee or a group of employees is laid off. The bottom line is that, since recently, organisations have followed the strategy of workgroups and teams with the goal of grouping workers into units whose sole purpose is to accomplish a shared goal (Couch and Placzek). A layoff occurs when a missing link within a team is added, affecting the team's overall performance. Employees of a software development company, for example, collaborate to produce an innovative product. If any member of the team is laid off, the innovative capacity of the team is affected, and this may have an impact on the overall product. This study, using research, will give an insight into how layoffs can affect an employee as well as the organization as a whole.

Negative Effects of Layoffs on Employees

Layoffs affect negatively the laid off staff, the survivor employees, and the prospective employees. According to the Bureau of Labor Statistic, America has 4.3% of its population that is unemployed (Couch and Placzek). This figure does not include the underemployed people who work as part-timers and would want full-time jobs. By including this figure, the number would significantly go high. Layoffs dim the hopes of the unemployed, and underemployed people have of getting job opportunities. The devastation the individuals who have lost their jobs go through discourage job seekers making some to give up completely on ever securing a job. Some of the negatives effects of job loss are outlined below.

Economic effects

Loss of earnings

During recessions, companies implement drastic cost-cutting measures and amongst them are shrinking their staff size. Staff shrinkage mean laying off some employees hence job loss. Losing a job means loss of income. A report by Couch and Placzek indicate that displacement has a 33% immediate earnings loss (573). The report places the cumulative lifetime earnings loss at 20% (Couch and Placzek 573). However, displaced employees are likely to be re-employed even on a part-time basis than a new job seeker is likely to get a job. Loss of income is directly related to low spending capacity. Lowered spending directly affects the demand for products in the economy. Lowered aggregate fall in demand fuels lowered sales, and with smaller sales, organizations are likely to send off more employees, and the cycle goes on (Couch and Placzek 574).

Duration of Unemployment

Researchers have also argued that displaced employees may experience extended durations of unemployment. Couch and Placzek reported that on an immediate basis, a displaced worker is likely to incur six years of unemployment and on an aggregate lifetime basis, they are likely to lose 20 years to unemployment (575). Critics of this argument suggest that this experience is not homogeneous since it varies from one worker to another as well as from season to season. They add that an employee is likely to have longer unemployment durations during economic recessions than expansions (Couch and Placzek 577).

Declined Quality of Earnings and Jobs

Economic losses experienced by an employee who has been displaced can also be explained by the resultant effect of unemployment on their quality of earnings as well as jobs. Researchers explain that earnings and job quality decline as the duration of unemployment extends (Couch and Placzek 577). However, the explanation by researchers is not absolute. Critics argue that the degeneration in income and job qualities may be a function of more factors beyond the duration of unemployment (Couch and Placzek 579). They further suggest that this phenomenon may be as a result of the challenges employees have that are related to the labor market. Employees with greater challenges may take longer to secure new jobs. Some of these challenges may be industry related such as a shift in operation by a previous employer, or the employer decides to permanently work with a reduced labor force (Couch and Placzek 580).

Non-Economic Effects

A layoff is a negative phenomenon that goes beyond the economics surrounding an employee. It is normally an unpredictable occurrence that is coupled with stressful experiences from the time an individual is notified of the layoff, anticipation, the actual dismissal, the unemployment duration, to the time one can secure a new job. In this case, they mostly end up securing jobs of lower earnings and qualities than their previous positions (Couch and Placzek 582). Some of the noneconomic effects are outlined below.

Impact on Psychological Well-being

Losing a job may adversely affect an individual’s mental health due to the resultant stressful events in their lives. It leads to a loss in status, capacity to organize time, and affects their structure of relations. People may often show acute stress due to immediate disruption, and chronic stress as a result of continued socioeconomic and mental strain. Researchers argue that employees who have lost their jobs are likely to report enhanced depression symptoms, somatic signs, anxiety, and loss of psychological effects such as life satisfaction, confidence, self-acceptance, esteem, and determination. Employees who have lost their jobs are likely to experience 15% to 30% more depression and anxiety than their counterparts who have not experienced layoffs (Eliason, Storrie& Donald 280).

Critics argue that layoffs are more of an exogenous effect in comparison to any other form of job mobility. They also add that employees who in the first place show distress, lack of self-confidence, and show lowered morale at workplace are at a higher risk of being displaced during layoffs than those who strongly possess these psychological assets (Eliason, Storrie & Donald 289). However, their argument fails to demonstrate the significant change in their being after the layoff.

Impact on Physical Well-Being

Individuals who have been dismissed from their jobs have shown both short and long term decline in their physical well-being. Some of the aspects they portray include worsening of self-health, instances of disabilities, cardiovascular based challenges, increased hospitalization, higher dependency on disability benefits, increased self-destructive activities such as suicide, and deaths (Eliason, Storrie & Donald 295). Some researchers have discredited these aspects by stating that employees who have shown conditions of not being well physically are the once who lose their jobs faster than those who are considered well (Eliason, Storrie & Donald 300). However, their argument fails to demonstrate the nature of their physicality once they are laid off.

Negative effects of Layoffs to Employers

Despite the usual notion that layoffs give organizations a quick relief during economic downturns, decades of research have shown that layoffs neither provide a cure for weak profits nor help an organization restructure itself for future growth. According to Cappelli of Wharton School of Business, no research has been able to support the idea that layoffs redress a company’s performance. However, this idea has support in a situation where an organization operates at overcapacity. Research also shows that laying off of employees does not improve profitability beyond the interim account bump (Cappelli).

In some instances, layoffs have been depicted to be a figment that has the potential to return and adversely affect the organization. Research has provided strong evidence that in organizations that are strongly steered by shareholders, layoffs are likely to take place. However, the announcement of such measures has negatively affected the stock prices of the organization (Cappelli). Shareholders may love when the decision is made but they may end up getting punished afterward. An example of such an occurrence was seen in American Express (Cappelli). The company was still profitable but not enough to address the concerns of investors. Its revenue growth rate target was placed at 8%, a point that was expected help it cut costs. Upon making an announcement that it would lay off about 4,000 employees, its stock price took an pressing downturn and remained nether at about 25% since the disclosure was made.


In conclusion, this study has been able to evaluate some of the negative effects laying off of employees may have on both the employees and the employers. The effects are not strictly limited to what is in the study. Layoffs can also have a direct cost effect. For instance a company may feel that it is saving money on payrolls and benefits but end up incurring heavier costs in terms of the moneys they have to pay to the leaving employees as well as the overtime payments that may be required to pay to the remaining staff as well as on the temporary staff they may need for some specialized activities.

Works Cited

Cappelli, Peter. “How Layoffs Hurt Companies.” Knowledge@Wharton, Wharton School of Management, 12 Apr. 2016, Accessed 21 Aug. 2017.

Couch, Kenneth A, and Dana W Placzek. “Earnings Losses of Displaced Workers Revisited.” American Economic Review, vol. 100, no. 1, 2010, pp. 572–589., doi:10.1257/aer.100.1.572.

Eliason, Marcus, and Donald Storrie. “Does Job Loss Shorten Life?” Journal of Human Resources, vol. 44, no. 2, 2009, pp. 277–302., doi:10.3368/jhr.44.2.277.

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