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Dilemmas of downsizing during the Great Recession: Crisis strategies for European employers

Dutch research, July 2013

Europe and many parts of the world are still in the grips of the Great Recession and consequently it has become business critical to reduce costs and increase productivity. Measures such as downsizing, outsourcing, terminations and reduced benefits are cost reduction strategies on the decision making table, but deciding between them is complex. Issues of sustainability mingle with concerns about  procedural fairness, as well as balancing diverse employee and organisational interests. Compounding this is the issue of generational fairness. Is it ‘right’ to apply the current rules and norms around Last In, First Out (LIFO), or, at the other end of the spectrum, should older workers be forced aside to give the next generation ‘a turn’?

The decision to downsize is almost always uncomfortable for employers. When faced with these tough decisions, employers generally have six options:

  1. Dismissals based on the Last In, First Out (LIFO) principle
  2. Dismissals based on the representative age structure of the organisation
  3. Early retirement of older workers
  4. Voluntary redundancies
  5. Short-time work
  6. Wage reductions.

In this 2013 research, Professors van Dalen (Tilburg University, The Netherlands) and Henkens (University of Amsterdam, The Netherlands) explored various European countries’ attitudes in relation to these downsizing strategies. The research paid particular attention to fairness and equity in decision making processes, and the impact of societal norms about older and younger workers.

By way of background, van Dalen and Henkens (2013) paint a picture of the current employment landscape in Europe, and the commonly held view that in an economic  downturn, younger workers ‘deserve a chance’. This expectation manifested itself in The Netherlands in the 1970s and 1980s, when early retirement arrangements were introduced to combat alarming rates of youth unemployment. The notion of ‘give them a chance’ dominated then, and has seen a re-emergence in the current day, given that youth unemployment exceeds that of older workers by a factor of two to four in some parts of Europe. Contemporaneously, social policies in many European countries (including pension reforms) have also signalled the importance of work for older workers given ageing of Western populations and the drain on the public purse. How would these conflicting messages be resolved by employers by facing downsizing decisions?

Aim

Van Dalen and Henkens (2013) aimed to explore the preferences employers had for the six downsizing strategies across a variety of European countries. The study also explored the reasons for opting for the dismissal options; particular elements of interest were generational fairness and perceived strictness of employment protections.

Method

Survey data were collected from Germany, Italy, Netherlands, Poland, Denmark and Sweden, with 3,625 employers included in the representative sample. The survey questions focused on employers’ behaviours and attitudes between March and November 2009. The central question upon which the findings were drawn was: ‘Suppose, under the current economic conditions, your organisation is forced to downsize 20% of your staff. Which of the following measures would you use?” The options were:

  1. Dismissals based on the Last In, First Out (LIFO) principle
  2. Dismissals based on the representative age structure of the organisation
  3. Early retirement of older workers
  4. Voluntary redundancies
  5. Short-time work
  6. Wage reductions.

Survey respondents were also asked questions about generational fairness (“Younger workers should get preferential treatment in staying on when an organization has to downsize”)  and the perceived strictness of employment protections (“How difficult is it for your organization to dismiss an employee who has a long tenure?”). Each option was rated using a Likert scale, ranging from 1 (strongly against) through to 5 (strongly in favour).

Findings

At a high level, results indicated that early retirement, buy-outs and short-time work were employers’ most commonly preferred options. Cutting wages was generally seen as an unpopular option across all countries although it would still be considered The Netherlands and Germany.

The findings in relation to generational fairness were more complex and showed significant variation between countries. In Italy, for example, 50% of employers were likely to agree that younger workers should get preferential treatment when downsizing, in comparison to an agreement rate of 13% in Denmark (with 49% of Danish employers expressing “no opinion”).  In contrast 56% of employers in The Netherlands, and 47% of employers in Germany, disagreed with a youth preference, and intriguingly, given high rates of youth unemployment in Poland, 46% Polish employers also disagreed.

Looking at this from another lens, the researchers examined the relationship between generational preferences and the degree of difficulty an employer would experience if seeking to terminate an employee with long tenure. The results were superficially conflicting, for example, whilst Italian employers tended to favour a preference for youth, 83% said it is very difficult to dismiss an employee with long tenure (and this represented the strongest response for all countries). This suggests that cultural preferences may override employment policies.

So whilst the researchers found that, in general, generational fairness influences downsizing preferences, so that “even those employers who strongly disagree with the preferential treatment of younger workers have a 52% likelihood of favoring early retirement as a downsizing option compared with 72% of employers who favor younger employees”.  

The researchers confirmed their hypothesis that employers who favour younger works would not be in favour of LIFO. Those who favour younger workers prefer tactics such as early retirement in an attempt to exit older workers. What was intriguing was that organisations with a larger percentage of older workers (i.e. 50 or over) also preferred tactics that favoured younger workers, and were more likely to prefer early retirement and buy-outs as exit strategies.

Implications

The bias towards youth, expressed as “generational fairness”, appears to over-ride public policies (expressed through legislation) which promote and indeed necessitate the employment of older workers. Employers may be unaware of the conflict between public and company policies promoting merit based termination decisions, and a bias to favour youth either overtly or indirectly through strategies such as downsizing via early retirement and redundancies which have a greater take up rate amongst older workers. Shifting employer decisions away from an “instinct” of generational fairness and towards merit is clearly possible as indicated by the Danish employers who are much more likely to adopt reduced working hours for all over redundancies or early retirement. Clearly more is to be done by Governments and employers to highlight the impact of age bias on career management, particularly in moments of financial stress, and to promote merit based termination decisions.    

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