What's Behind Pink-Slip Economy
THE American economy is starting off the new year with a shower of colored paper - not confetti, but job-loss pink slips.
AT&T's jarring announcement of a plan to shed 40,000 jobs may indicate that corporate restructuring will continue with a vengeance in 1996, even as company profits remain strong. The reason: Firms no longer resort to layoffs only when in trouble.
Job cuts have become a common strategy for managers of profitable companies to try to stay ahead in today's hypercompetitive economy. The result often pleases Wall Street, but this culture of business ruthlessness may also be a prime reason for rising anxiety in America's embattled middle class.
It's an old US economic story: Dynamism creates wealth - and uncertainty - for many people.
"To see a blockbuster cut like this is disturbing," says John Challenger, of Challenger, Gray & Christmas Inc., a Chicago-based outplacement firm.
AT&T's move, announced on Jan. 2, represents one of the largest employment restructurings in American corporate history. When combined with an 8,500 job reduction effort already under way at the AT&T computer division, the 30,000 employee layoff will result in an overall reduction of about 16 percent in the communication giant's work force.
Most of the reductions will occur this year, as the firm readies itself to split into three separate companies. The action was made necessary, claimed AT&T officials, by coming deregulation of the communications industry, and the continued incredible pace of electronic technical change.
"I understand how wrenching it will be for employees and their families. But the actions we are announcing today are absolutely essential if our businesses are to be competitive," said AT&T chairman Robert Allen.
The move was also the latest wave in the hurricane of job cuts that have swept corporate America in the 1990s. IBM, Polaroid, Nynex - many of the country's most productive businesses - have announced layoffs in recent years, for a total of about 2.5 million lost jobs. The trend, which peaked in 1993, has not abated even as corporate profits have soared. For 1995, 420,000 US workers received pink slips, according to Challenger, Gray & Christmas.
The economy continues to create thousands of new jobs, and the overall unemployment figure remains relatively low, at 5.6 percent. But that is little comfort to a displaced employee with a family and a mortgage. Job cuts may well be driving down middle-class morale across the country: The Dow Jones industrial average may be setting new highs, but the Conference Board's widely watched consumer confidence survey showed a decline in December. That means that worried households plan fewer big purchases in the near future.
And more turmoil may lie ahead. The economy is likely to see further layoffs. One big reason: Wall Street.
The stock market generally rewards companies it believes are becoming more productive, and cutting costs through layoffs is one of the quickest and easiest ways to reach productivity goals. It's no accident that AT&T's stock price ticked up $2.60 on the day of its restructuring announcement.
"Wall Street is an important driver in all of this process. There is a standard of performance called shareholder value," says Gail Fosler, chief economist at the Conference Board in New York.
Chief executives aren't necessarily making their layoff decisions casually, says Ms. Fosler. US corporations were insulated from fierce competition for many decades, and as the economy becomes more global and competition increases, firms can no longer afford the generous personnel structures of the past.
Companies want "long-term superior profitability," says Fosler.
In fact, the pace of global competition and business deregulation is such that today's marketplace may be exponentially tougher than that of the past.
Layoffs may thus represent a long-term shift in the way managers view their business environment. Richard D'Aveni, a professor at Dartmouth University in Hanover, N.H., calls it "hypercompetition," a new business climate where firms must constantly refine strategies and adapt to stay ahead of competitors.
In the early '80s, managers adapted to changes in industry structure as if such transitions were one-time events. Then they sat back and waited. Now restructuring is though of as a constant of business. "This is the kind of thing that's going to go on for the foreseeable future," says Fosler.
*Staff writers Shelley Donald Coolidge and Mark Trumbull contributed to this story.