Layoffs may boost severity of recession

October 29, 1990|By New York Times

Many American companies are laying off workers now, rather than waiting to be hit by hard times as they have in the past. Some economists warn that this outburst of corporate preventive medicine increases the odds of a steep recession.

The number of people laid off in the United States has increased sharply since June, reaching the levels of the early months of the 1981-82 recession. While some companies, including Citicorp, Digital Equipment, and McDonnell Douglas, are acting because sales and profits have already begun to shrink, many others, including General Electric's appliance division and Nordstrom Inc., are only anticipating such a downturn.

"Businesses are scared and they are cutting costs in anticipation of what they think might happen," said Stephen S. Roach, a senior economist at Morgan Stanley & Co. "That sort of cost-cutting keeps American companies competitive in the world marketplace. But pre-emptive layoffs can be self-fulfilling, frightening people into spending less, which further weakens the economy."

The layoffs, and a smaller number of outright dismissals, in recent months have come in the service sector as well as in manufacturing, reflecting a new interest in cost-cutting, particularly among retailers and financial-services companies. Manufacturers have practiced this sort of cost-cutting for a decade to make themselves more competitive.

"Recessions have become a good opportunity to improve productivity, often by dropping people and putting in automated equipment," said Martin N. Bailey, a senior fellow and productivity expert at the Brookings Institution.

Such concerns about productivity have been cited in layoff announcements this month by Nordstrom, GE, Saks Fifth Avenue and Burger King, among others.

Whatever the dynamics, the number of American workers who describe themselves in Labor Department surveys as temporarily laid off reached 1,127,000 in September, up from 918,000 in June, the Labor Department reports.

While September represented a particularly sharp jump, the total has been rising steadily from an average of 808,000 in the first half of 1989 -- the lowest level since the 1981-82 recession.

While the more than 7 million people who are unemployed include anyone 16 to 65 years of age who claims to be out of work and looking for a job, the number of layoffs is the number of people who say they are temporarily absent from work for reasons other than illness or vacation. They expect to be recalled to work, although whether the companies plan to do so is not considered in the Labor Department survey.

During the last recession, the number of people on layoff rose above 1 million in mid-1981, as the downturn was getting under way, and then climbed rapidly to a peak of 2.5 million in September 1982, swelling the ranks of the unemployed and pushing up the unemployment rate to more than 9 percent, a level that endured until a year after the recession had ended.

This time, the process seems to have begun earlier in the downturn and is proceeding more slowly. That is reflected in the unemployment rate, which has risen only gradually, reaching 5.7 percent last month, from 5.2 percent in June.

"Companies are managing their workers as they manage their inventories of unsold goods," said Leslie McNulty, research director of the United Food and Commercial Workers Union. "They are trying to keep both sets of inventories -- employees and merchandise -- as low as possible."

Various tactics are being used to hold down payrolls without running up the number of people let go. A major one is reducing workers' hours. Tens of thousands of workers are being told, in effect, to choose between a layoff and a shorter schedule, said Jack E. Bregger, a Labor Department economist.

The number of people falling into this "slack work" category jumped to 2.65 million in September, from an average of 2.45 million for the first eight months of the year, the Labor Department said.

Another strategy is not to fill vacancies. Many smaller companies are responding to the weak economy, particularly in the Northeast, by not hiring for jobs that a year or two ago these companies said they could not fill because of a shortage of qualified applicants.

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