Cuts in staff are a blunt weapon

A research paper, published today in the influential Journal of the Royal Economic Society, will finally downsize downsizing.

A research paper, published today in the influential Journal of the Royal Economic Society, will finally downsize downsizing.

Decades of cost-cutting by companies in Britain, America and Europe will be shown to have harmed economies, stifled innovation and increased unemployment.

The study, by Jan Boone, a doctor of economics at Tilburg University in the Netherlands, will add to the controversy over cost-cutting measures by corporate giants such as NatWest, Procter & Gamble and Corus.

In recent weeks Corus, the Anglo-Dutch steel group, has announced thousands of job losses, mostly in Wales, blaming the strong pound. Its moves were criticised heavily by trade unions and MPs.

A few weeks earlier BAe Systems was attacked from similar quarters after it launched efficiency cuts, which led to 3,800 redundancies.

But the most striking recent attack on downsizing came from within Procter & Gamble, the giant US consumer goods group. It replaced its chief executive, Durk Jager, after he had cut over 15,000 jobs from the company's payroll. The explanation was that he had changed too much, too quickly.

Dr Boone's study uses various measures of innovation and of welfare benefits to calculate the economic effect of downsizing.

He found that companies overestimated the benefits of firing employees, and that their calculations of profit maximisation were outweighed by broader societal losses.

Dr Boone also reported that the gains in efficiency claimed by companies were not translated into higher output and employment. This conclusion was backed by a Wall Street Journal study which found that in only 9 per cent of cases did downsizing measures improve the quality of products.

Dr Boone also claims that downsizing stifles innovation, making companies less efficient. "Because top management's attention is limited, it is very hard, if not impossible, for a firm to fire employees and... invent new products and improve existing products," he concludes.

As Dr Boone notes in the paper, Robert Reich, the then US Secretary of Labor, put the point succinctly in 1996 when he said "downsizing has gone way too far".