2016-05-29

On layoffs

There is a certain economical logic in companies going bankrupt or being forced to do layoffs. When a company does not provide enough value anymore to society, it should release some of the resources (namely people and materials) for doing something more useful for society.

There are, of course, some pitfalls here.

When someone that is fired cannot find another job, the actual value in society is decreasing. Even premature retirement can have a similar loss effect on society if that person was still creating some value and after retirement he doesn't find something useful to do (like volunteering, helping family).

Fact is that most of the employees are not responsible for efficient resource allocation and don't have the means to know when they need to switch to a more valuable activity. Therefore, they should get some protections over bad investment decisions made when they were hired. Especially on large scale layoffs, it is not practical to find another job in the first months. Because of this, it makes sense for the company to be required to provide a number of months of compensation after the layoff.

There is also the issue of what is "value" for society. The best way to evaluate this is still the price that the society is willing to pay to a certain product or service. This way of assessing value is not perfect, for example people value things that hurt their health, like cigarettes. Even if we don't talk about vices, people still pay money for questionable products and services.

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One company that has useful products can lose "share of wallet" because money are redirected to less useful products that are "on hype". However, free market is still the best known way to allocate resources in economy, any attempt to centralize it was a big failure (see communism).

A company that has high quality products could face competition from less expensive but low quality products. If the flaws are not very visible at the start, potential clients can be tricked into the "bad company" resulting in financial problems for the "good company".

One important drawback of layoffs is that the company who fires people could face an important decrease in productivity because of loosing knowledge and because of the moral impact on the remaining employees. Confronted with the layoff spectrum, good people could easily find another offer and leave the company even if they were not targeted by the layoff.

Bottom line:
Layoffs are meant to release resources to more efficient activities. However, the reality is more complicated than this. When this is not done with great care, it might create more damage than "efficiency" in society.


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