20-04-2024
10 minutes

Group Layoffs – Should We Be Worried?

Recently, there hardly seems to be a day when the media – particularly the headlines of newspapers – don’t try to grab our attention with alarming news about various companies conducting group layoffs. Although there are many credible, balanced articles, there are also those whose tone is downright catastrophic. Meanwhile, the facts are significantly less ‘newsworthy’; it’s hard to find any sensationalism in them.

Nevertheless, it’s worth leveraging the attention focused on the job market to highlight a few important issues, because it’s not that there are no significant changes occurring in this market! The nature of these changes, however, is different from what the media suggests. But let’s take it step by step.

 

Group Layoffs – What are the Facts?

Let’s start with the scale of the group layoffs that are so prominently reported today. According to data from provincial labor offices, over the last 12 months (from March 2023 to February 2024), workplaces have reported to the offices an intention to lay off just over 32,000 employees. As we can see in Figure 1, this number has been climbing recently, but there is no talk of an anomaly or disaster. Over the past few years, we have observed such levels not only during the pandemic but also earlier (Figure 2). Even if the number of reported layoffs increases slightly in the coming months, it will not be a threat to the economy.

This becomes clear when the size of the reported reductions is compared to actual employment (that on payrolls). Then it turns out that mass layoffs over the last 12 months constitute only 0.3% of employment. It’s also worth noting three additional facts. First, the actual scale of mass layoffs is significantly lower than announced: considering the situation over the last ten years, the actual layoffs accounted for about 60% of what was announced. This happens for various reasons, such as improved economic conditions and changes in plans or transfers to other facilities within the same conglomerate. Second, the scale of reported reductions is largest in well-developed regions of the country (exception is Warmian-Masurian, Figure 3), where the demand for labor is highest and most diverse, and the unemployment rate is close to 0%. In such a situation, finding new employment should not pose a major problem, especially since the statistics of new job offers reported to labor offices are relatively high, particularly considering the phase of the economic cycle. Third, demographics are doing their part – every year, 150-200 thousand people leave the labor market, which naturally prevents the emergence of greater tensions.

In summary, the scale of media interest in mass layoffs is disproportionate to the actual significance of this phenomenon from the perspective of economic and social processes. However, the message itself can cause much more harm if it begins to shape the beliefs of households – creating unnecessary fear and concerns – thereby translating into a reduction in the propensity to consume, which is supposed to be the driving force of the economy this year. If consumption does not rebound based on artificially created fears, the final scale of layoffs may turn out to be greater.

At the same time, I do not deny the fact that for those being laid off, or even some local communities (e.g., dependent on a specific employer), the current situation may pose a challenge, but that is a somewhat different issue. In particular, we should not create the impression that working for the same employer throughout one’s life is the norm – that is a past that will not return! We must foster awareness that the job market will continue to change, and as such, we need to learn to live with this (more on this below).

 

Who is Laying Off and Why?

To complete the picture of the current situation, it is worth looking at the structure and reasons behind the recent group layoffs.

In terms of industry structure, it is very diverse: ranging from manufacturing through services (including so-called service centers handling orders for foreign clients, as well as IT services), to banks. Therefore, we are not dealing with any asymmetrical factors (affecting 1-2 selected sectors), but rather processes that seem to have a fairly universal character.

Some are concerned by the fact that many of the companies laying off workers have foreign capital. However, there are natural reasons for this. First, there is a high participation of such companies in many sectors (mechanical vehicle production, banking services, service centers, etc.). Secondly, these companies are more flexible – they usually have manufacturing locations or service provision points in several different locations in Europe/world, which makes it easier for them to adjust their operational structure to changing economic conditions and make quick optimizations.

It’s time to examine the reasons behind the elevated level of mass layoffs. Commonly cited reasons in the media include: economic slowdown (affecting demand) and a drastic increase in energy costs and labor costs (including due to the rise in minimum wage).

In my opinion, the reasons for employment adjustments in some companies can be divided into two groups. The first group relates to the phase of the economic cycle – the slowdown in the economy we have been experiencing for several quarters and from which we are slowly emerging. Some of the current layoffs are a derivative of the fact that in the autumn, at the bottom of the economic cycle, companies made financial plans for 2024 and some of them concluded that achieving planned results requires cost optimization (including employment). Importantly, companies generally have room to “cut back”. The last few years have been a time of record financial results and employment expansion in many industries. Now – in times of slowdown – it’s time for reflection and adjustment. This is a natural process in a market economy. It’s worth noting that among those laying off are sectors (industry, IT) for which the last few years have been “golden times”. The processing industry was a kind of beneficiary of the pandemic (it shifted consumption from services to industrial products) and the influx of refugees from Ukraine (increased demand). The IT sector benefited from the boom in e-commerce solutions and the reorganization of work in companies based on new models. Now the cyclical downturn has arrived, also due to the fact that this industry is heavily dependent on public orders, and we are currently seeing a decrease in orders associated with the end of one EU budget cycle and the slow start of a new budgetary perspective.

 

Structural Changes in the Economy

The second group of factors can be termed structural. They are related to four shocks that our economy is undergoing, which have a long-lasting impact: demographic, technological, energy, and geo-strategic shocks (more about these in “Four Shocks that are Changing the Economy“). The effect of these shocks are strong shifts in relative prices across many dimensions: labor costs relative to capital, raw materials relative to finished products, one commodity relative to another, one currency relative to others, one wage relative to others, etc. This, in turn, means that we are seeing changes in profitability perspectives in essentially all forms of business operations, in some industries/companies positively, in others negatively. The ultimate consequence of these processes will be a gradual change in the structure of the economy (a new place in the global division of labor), and subsequently, local jobs.

How do these structural factors practically impact the job market? It varies greatly depending on the industry. For example, in industrial processing, the business model based on “cheap labor” is becoming unprofitable, hence we can expect that assembly plants for relatively simple products based on this model will start disappearing unless they automate their processes.

A good example of structural changes is also the layoffs in the banking sector. Banks actually recorded solid, long-unseen results in 2023. Nonetheless, some of them decided on significant employment reductions. In this case, the deciding factors – it seems – are structural changes, including the impact of technological progress on ways of interacting with banks, which increasingly do not rely on a physical employee’s presence.

Structural changes also pertain to IT services. During the pandemic and the widespread adoption of remote work, this type of service market became highly international, with cross-border service provision becoming common. Our IT professionals benefited from this process, as they could earn higher than domestic rates. However, many local companies that were based on a subcontractor model for foreign companies employing cheaper, local IT professionals experienced a shock. Suddenly, it became clear that they had to change their business model – offer something unique, of high value – or else they would be ousted from the market. Additionally, artificial intelligence-based solutions emerged, further displacing simple tasks.

Such examples of structural impact from the above-mentioned shocks can be multiplied. It should be expected that some of the layoffs currently being made are indeed due to these factors

 

New Models of the Labor Market, Society, and Economy

While factors of a cyclical nature will cease to affect relatively quickly (probably by mid-year), those with a structural basis will remain with us for years. We must expect that increased turnover in the labor market will become a permanent feature, and therefore we need to adapt to this situation on several levels.

In the macroeconomic context, the most important issue will not be whether those laid off now and in the future will find jobs—because they most likely will—but what kind of jobs they will be. As a result of structural changes, there will be more better (more productive and higher-paying) jobs than today. Optimism in this regard is fueled by the quite high level of foreign investment, indicating that although some investors are closing their factories here (usually in traditional, low labor-cost industries), new ones are appearing for whom the primary concern is the high competencies of employees. To strengthen these processes, and thus push our economy to a higher level of development, we need to support the creation of such jobs (you can read more about how this can be done in “Building a Good Jobs Economy“).

For companies, creating good jobs is correlated with their march towards higher added value. How? Through various types of investments. I have already mentioned mechanization, but the range of possibilities is much wider. Starting from marketing expenditures aimed at building a strong, unique brand, through investments in research and development, capital expenditures (acquisitions of other companies to ensure scale effects), or finally investments in so-called human capital (skills and competencies of employees). The role of the state in this context is to create relatively comfortable conditions for making investment decisions, especially through a transparent and stable tax and regulatory policy. The modern economy also requires access to clean and cheap energy. We have significant delays in this respect, which we must quickly make up for. This is a strategic issue for our country in the context of company investments and new positioning in the global labor market.

At the individual level, there needs to be widespread awareness that the labor market is increasingly operating in a new regime: faster erosion of skills, greater turnover, moving away from the model of continuous work. We need to learn to function in these new conditions, accept them as normal, and learn to live with them. It will be much easier to adapt if this is accompanied by appropriate labor market policies, in particular focusing on employment security (which is not equivalent to the security of a specific job position!) and labor market institutions adjusted to new conditions.

 

Finally, returning to the media, it would be good if they became carriers of the change we need. To engage in the process of building awareness of the processes taking place in the Polish (and not only Polish!) economy and society. The sooner we build a common picture of what is really happening, understand the essence of the transition to a new socio-economic regime, the easier it will be to make necessary adjustments and take further steps towards socio-economic progress

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