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Dilemmas of Downsizing During the Great Recession: Crisis Strategies of European Employers

Abstract

The present paper analyzes the choices faced by European employers when threatened with the prospect of the mass lay-off of their employees as a result of the Great Recession. By means of a representative survey among employers in Italy, Germany, Denmark, Poland, the Netherlands and Sweden in 2009, we show that employers mainly prefer to tackle such threats by offering short-time work, and by early retirement packages to older workers, in conjunction with buy-outs. The latter preference is particularly visible in countries where employers perceive the level of employment protection to be high. The only notable exception is Denmark, where employers prefer to reduce working hours. In general, a sense of generational fairness influences downsizing preferences, with those employers who favor younger workers particularly likely to use early retirement and buy-outs when downsizing, followed by working time reductions. Wage reductions and administrative dismissal are less favored by European employers. In particular, CEOs and owners are more inclined than lower-level managers to cut wages.

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Notes

  1. 1.

    However, today’s circumstances are different from those of the 1970s and 1980s when countries were enjoying the demographic dividend of a growing population. Today, the demographic dividend may be thought of as a demographic hangover because the growth of the potential workforce has petered out. In addition to the demographic context, the Great Recession of today makes the considerations of downsizing not a fictional choice but rather a dilemma faced by most employers, if not in reality then at least in the backs of their minds.

  2. 2.

    An additional insight offered by Pfann and Kriechel (2005), based on a detailed analysis of the downsizing case of Fokker in 1996, is that employment protection which increases the firing costs will cause shifts in relative demand towards skilled workers. Or as they note: “If an increase in overall firing costs prompts downward adjustment of the workforce, the firm’s most productive workers employed in the highest hierarchical levels of every skill group face the lowest lay-off risk.”

  3. 3.

    An important reason why the response rate of Germany differs from the other countries may be related to the fact that only one reminder was sent out to respondents.

  4. 4.

    Although the questionnaires used in the sample countries were identical, the interview techniques differed by country depending on what was perceived to be the best way to address respondents. Denmark used computer-assisted web interviewing; Germany, the Netherlands and Sweden used paper-and-pencil surveys; and France, Italy and Poland conducted interviews using the computer-assisted telephone technique.

  5. 5.

    In the analyses at the national level, we weighted the data afterwards to account for the sampling design (see Conen 2013) in order to ensure all observations were representative of the population of employers. Weights were constructed according to the population of business units from national statistics bureaus and corrected for the sectors and sizes of business units.

  6. 6.

    For the various sample countries, we list here the OECD indicators on a scale of 0 (least) to 6 (most restrictions) for these two cases of dismissal: protection of permanent workers against individual dismissal (Ind). specific requirements for collective dismissal (Col): Netherlands (Ind: 2.73; Col: 3.00); Italy (Ind: 1.69; Col: 4.88); Denmark (Ind: 1.53; Col: 3.13); Sweden (Ind: 2.72; Col: 3.75); Poland (Ind: 2.01; Col: 3.63); Germany (Ind: 2.85; Col: 3.75). The (pairwise) correlation between these individual and collective employment protection indicators and the perceived strictness is statistically significant: r = 0.18 (\(p < 0.01\)) for the individual dismissal indicator, and r = 0.30 (\(p < 0.01\)) for the collective dismissal indicator.

  7. 7.

    For all models in Table 4 (columns 1–6) we tested whether a non-linear specification of the variable describing the perceived strictness of employment protection gives a better fit compared to the linear version used in Table 4. None of these tests yielded a significant improvement (at \(p < 0.01\)) of the listed models.

    Table 4 Ordered logistic analysis of the preference for using one of the downsizing options
  8. 8.

    The percentage of older workers may indeed capture the stylized effect measured by Autor and Dorn (2009) and Bosch and Ter Weel (2013) that older workers are more often employed than young workers in declining industries or professions.

  9. 9.

    Considering the fact that most public sector organizations are very large, it stands to reason that early retirement programs and buy-out packages are used to solve the downsizing puzzle.

  10. 10.

    Fischer and Sousa-Poza (2010) offer a complementary cross-sectional view (with the use of SHARE data) on the probability of retiring early with severance pay in a number of European countries. However, it should be noted that the setting—no need for mass lay-offs, no crisis conditions within a firm—and the focus on the employee having retired early is distinctly different, making further comparisons of research findings somewhat difficult.

  11. 11.

    One can also make the case that employment protection legislation is the embodiment of fairness to older workers.

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Acknowledgments

Constructive comments by two anonymous referees are gratefully acknowledged.

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Correspondence to Hendrik P. van Dalen.

Appendix: Descriptive statistics for individual countries

Appendix: Descriptive statistics for individual countries

See Table 6.

Table 6 Descriptive statistics per country

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van Dalen, H.P., Henkens, K. Dilemmas of Downsizing During the Great Recession: Crisis Strategies of European Employers. De Economist 161, 307–329 (2013). https://doi.org/10.1007/s10645-013-9211-7

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Keywords

  • Downsizing
  • Early retirement
  • Fairness
  • Older workers
  • Recession

JEL Classification

  • D2
  • J63
  • J23
  • J26