IEarlier this summer, Elon Musk reportedly emailed colleagues at his electric vehicle company Tesla that he had a “super bad feeling” about the economy and that he planned to cut employees at Tesla by 10%, a move The plan he later executed, the company’s first in a continuous stream of announcements about layoffs that intensified this month.
The strange thing about Tesla boss Musk’s harsh decision is that his company is having arguably the best year ever. Musk said during an earnings call in July, the second quarter of 2022 was “one of the strongest quarters in our history,” adding that Tesla had “record-breaking” potential in the second half of the year. Profit was $2.3 billion, more than double the previous year, and earnings per share were significantly higher. beat analyst estimate,
Musk is not the only CEO who is cutting jobs based on feelings of doom and gloom as his companies flourish. Oracle cut across the company, even after reporting that revenue was up 5% — and that the company is “in a position to deliver great revenue growth over the next several quarters.” Microsoft laid off about 1,000 people and then reported in late July that benefits rose 2%. Even Ford, which said in late July that its net income was up 19% and that consumers are buying products as soon as possible, the company plans to make them. cut thousands of workers in the coming weeks.
debate over is America in recession But if the recession hits the US economy, it is CEOs, not consumers, who should take most of the blame after sweeping layoffs, even if their companies are delivering strong performances.
Read more: Why recession is not inevitable
In some ways, the overall economy looks very strong. The US economy added 528,000 jobs in July, the government said on August 5, nearly double what analysts were expecting. The unemployment rate fell to 3.5% – the lowest since the pandemic began.
And consumers are still spending big: Retail spending in July rose 11.2% over the previous year, according to mastercard spending pulse, which measures in-store and online retail sales across all forms of payment. (It has helped that gas prices, one of the factors affecting consumers’ pocketbooks, have fallen for 50 straight days and are Near $4 per gallon.) Companies including Starbucks, Uber, Airbnb, CVS and Starbucks have said they are doing very well and buyers are coming out in large numbers. “We haven’t seen signs of a slowdown yet, as the company posted a 70% increase in revenue from last year,” Marriott CEO Anthony Capuano said on Aug.
Yes, there are some worrying economic indicators—the number of people applying for unemployment benefits weekly growing up In recent weeks, GDP growth has been negative for two quarters, and interest rates have been climbing. And it could be argued that strong company earnings reports only reflect how they performed over the past quarters. What’s more, some CEOs are looking around and realizing that amid the war for talent they’ve had to offer high salaries, their payroll figures make them uneasy; Hourly earnings are up 5.2% over last year. Still, some recent job cuts and hiring freezes are unusual because they are anticipated rather than a reflection of companies already struggling.
“I believe only the insane survive,” said Daniel Eck of Spotify, at the end of july, announcing that the company would “actively” reduce hiring by 25%. “And we’re preparing as if things could get worse, but it’s hard to be anything but optimistic about what I’m currently seeing.” The company added 5 million more users than last quarter’s estimate and posted 23% revenue growth.
Changing attitude towards job cuts
For much of the last century, companies didn’t lay off workers until they were in trouble and needed to cut costs, says Matthew Bidwell, a professor of management at the University of Pennsylvania’s Wharton School. Then, in the 1990s, even profitable companies began to shrink in size. “They became comfortable with, ‘We’re making money, but we can make even more money,'” he says. It was around that time that companies stopped investing so much money in workers, got rid of pension plans and other benefits for long-time employees, offered less training, and generally accepted workers as interchangeable. I saw Those changes have made it easier for employers to justify cutting employees. For example, in 1979, less than 5% of Fortune 500 companies announced layoffs, During the Great Recession and its aftermath, 65% did.
It’s become a way for CEOs to signal that they are strong, decisive leaders, Bidwell says—even if those decisions are best for the company and the larger economy.
That style of leadership persists despite signs from hundreds of companies that they are abandoning such shareholder capitalism. stakeholder capitalism, an approach through which companies incorporate the interests of workers, the environment and local communities into their decision-making processes. But companies promoting stakeholder capitalism don’t even appear keeping your promises, Some companies that recently announced layoffs have said they expect their business to continue to grow this year, raising questions about how they will continue to grow with fewer employees.
After Microsoft rolled out its layoffs in July, the company reported earnings increased 2% and is expected to accelerate growth. “We expect double-digit revenue and operating income growth for the rest of the year,” Microsoft finance chief Amy Hood told analysts on July 26.
Meanwhile, Unity Software laid off 200 people in June, weeks after reporting 36% of revenue over the previous year, and CEO John S. Riccitello said on an earnings call that Unity “will sustain and grow revenue by 30% or more per year over the long term.”
Niantic, the private maker of Pokémon Go and other games, said in June that it would cut 9% of its workforce to prepare for “the economic storm ahead.” CEO John Hanke. That same month, Pokémon Go reportedly surpassed $6 billion in lifetime revenue, one of only a handful of games to cross that mark.
Such layoffs could play a role in how the economy is perceived in the medium to long term, which could have implications elsewhere in the economy. These layoffs are helping to contribute to stifling consumer sentiment about the economy, which in itself could contribute to a recession. American households may cut spending in anticipation of bad times, even if their finances are doing well, and hired workers will behave cautiously until they find a new job.
Retail giant Walmart, which is seen as a bellwether for the US economy, recently said that its customers are already cutting their spending on non-essential, high-margin items, such as apparel. so that the company reduce its profit outlook And laid off hundreds of its corporate employees. trick spark worry Concerns about the health of the American consumer and those in its competitors sent shares tumbling. Meanwhile, another retail giant, Amazon, nearly cut its workforce. 100,000 last quarter.
long term effects of layoffs
Research shows that layoffs are almost always bad for a company, says Sandra J. Sucher, professor of management practice at Harvard Business School. Workers who haven’t been laid off will start looking for other jobs because they feel uneasy about their employer’s prospects. Those who have been laid off, especially in technology, will find jobs among competitors and help them innovate; Tesla’s recently fired employees have gone to competitors such as Rivian, Apple, Amazon and Lucid Motors, according to the news site electrek, And blanket layoffs that try to hit a target percentage — say, 10% of employees — often purge people who play important roles within a company, such as unique relationships with customers or suppliers. Reducing a workforce by 1% can increase voluntary turnover by 31%, according to one discovery by researchers from the University of Wisconsin-Madison and the University of South Carolina. Another study by researchers from Stockholm University and the University of Canterbury found that after a layoff, survivors in companies experienced a 41% drop in job satisfaction.
“The fact that these prove to be self-defeating decisions makes this a particularly bad strategy,” Sucher says.
What’s more, even well-qualified workers can struggle after losing their jobs; a study Of the workers laid off during an economic boom, only 41% had found work a year later for the same or higher pay. The rest had found low-paying jobs or left the labor force altogether. When this happens to thousands of workers, there is a ripple effect in the economy, where even employed workers are retreating to adjust to their new reality.
Layoffs used to be a sign of bad management, that you’re a CEO who doesn’t really know what’s going on with your company and can’t anticipate change, Sucher says. But this assessment has faded into the view that a falling stock price is a sign of poor management. Therefore, this cut of employees in the face of strong profits is not limited to this peculiar phase of 2022, when no one knows what is going to happen in the economy. Washington Post December 2020 found that 45 of the 50 most valuable publicly traded companies made a profit between April and September 2020, and also that At least 27 out of 50 implemented Sorting in the same time period.
Many of those companies soon realized their mistake and scrambled to add workers back as consumer demand boomed. They could not fill some positions quickly, which hurt their business. The pattern seems to be happening again. For example, Marriott laid off thousands of employees at the start of the pandemic and cut its corporate headcount by 17%. Then, in September, the company said it would “fight for talentBecause it tried to recruit 10,000 new employees.
The conflicting behavior of business leaders is making it even more difficult to predict where the economy is headed. But with each layoff and the forecast of gloom facing CEO growth, the potential for further economic storms increases.
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