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  • Downsizing in America: Reality, Causes, and Consequences
  • Charles Koeber
Downsizing in America: Reality, Causes, and Consequences. By William J. Baumol, Alan S. Blinder, and Edwared N. Wolff. Russell Sage Foundation, 2003. 321 pp. Cloth, $29.95.

In this comprehensive study of 1980s' and 1990s' downsizing, economists Alan Baumol, Alan Blinder, and Edward Wolffpursue the answers to three main research questions. First, they attempt to clarify to what extent firms reduced the size of their work forces. The authors argue that much of what ostensibly appeared as downsizing was, in reality, a "regression toward the mean": larger firms and firms in shrinking industries downsized and smaller firms and firms in growing industries upsized. For instance, while downsizing occurred in large manufacturing firms, smaller retail and service firms experienced upsizing. Also, they argue that many have conflated downsizing with the "churning" of labor that occurs with the restructuring of a firm. While restructuring firms fire some types of workers, they hire others. Subsequently, the size of their overall work forces do not contract, and may even increase (upsize) over time.

The second research question explores the consequences of downsizing. The authors bust some popular managerial myths. They argue that downsizing was not an effective strategy to increase competitiveness, nor did it improve productivity. Downsizing did increase profitability by virtue of reducing the cost of labor and "squeezing" savings in wages into profits. However, these profits did not translate into higher stock prices, as stock prices of downsizing firms tended to fall. Unfortunately, with regard to consequences for workers, rather than busting myths, the findings reinforce the reality of what many of the downsized already know: downsizing, restructuring, and churning all added up to increased turbulence in the labor market. Workers changed jobs and industries substantially more often than in the past.

The third research question addresses the factors that influenced firms to downsize. Here the authors make their most important contribution to the literature, as studies of the causes of job displacement are lacking. To examine these influences the authors test six interrelated hypotheses:

  1. 1. Downsizing occurred because technological change favored smaller enterprises.

  2. 2. Faster innovation led to more labor market churning.

  3. 3. Foreign competition compelled domestic industry to downsize by trimming "fat." [End Page 878]

  4. 4. Downsizing occurred when capital was substituted for labor.

  5. 5. Downsizing was a consequence of the breakdown of the social contract between labor and capital.

  6. 6. Downsizing amounted to the "blue-collarization" (deskilling and displacement) of white-collar labor.

The results of the hypothesis testing are insightful. Although fluctuations in product demand influenced downsizing during the short-term, efficiency in production was more important over the long-term. This efficiency was largely influenced by technology, the operation of which sometimes required firms to adjust their workforces to become either smaller or larger. The authors found no evidence for a unidirectional trend in which capital was substituted for labor. They did find that firms that competed with imports downsized more than firms that did not compete with imports. Limited support was found for the hypothesis that downsizing was an outcome of the breakdown of the social contract. The authors found no support for the last hypothesis, as the ratio of managers to workers increased in downsizing firms and lower-level blue-collar workers bore the brunt of downsizing.

Downsizing in America provides new and useful information. It also reveals, however, some problems that can occur when attempting to construct an objective and scientific term out of something (downsizing) that is subjective and corporeal. In their attempts to capture and set forth the essential meaning of the term downsizing, the authors assign an overly narrow definition which tends to view downsizing as a permanent reduction in the size of a firm's work force. As a result, econometric discussions of firm size sometimes tend to overshadow the social relevance of downsizing. Downsizing should not be reduced to or conflated with a reduction in firm size. Rather, it is a complex and relational process that constitutes part of a set of contemporary changes that have occurred in the nature, organization, and quality of work.

In spite of this criticism, I found Downsizing in America to be a...

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