Economics, Commerce and Industrial Relations Group
Economic growth and productivity
Downsizing - what does it mean?
The Sampson View
The changing rules of corporate
Implications for living standards and
How can the process of economic growth be managed so that it
delivers more jobs and higher living standards through real wage
increases? An answer usually put in response is by improving
productivity. This paper reviews the recent controversy sparked by
US economist Stephen Roach concerning corporate strategies to
achieve higher economic growth and, eventually, higher employment.
Formerly influential for his views on corporate restructuring, Mr
Roach denounced those methods which required large scale
job-shedding and the rationalisation of plants and product lines.
He now argues that this form of corporate restructuring or
downsizing is not the necessary precondition for delivering either
growth of the corporation concerned or of the national economy.
The paper reviews the comments of Mr Roach and other views on
downsizing. It outlines the argument that improving productivity is
traditionally the basis for rising living standards. It reviews one
corporate instrument of increasing productivity in the context of
the economic contractions of the 1970s (interpretations of trends
in productivity are central to Mr Roach's recantations).
The term 'downsizing' is described and the aspects of the recent
controversy are reviewed, since other views have long questioned
the wisdom of drastic corporate restructuring. Also, the paper
looks at how the rules of corporate governance have changed in the
1980s and 1990s. The change in the operation of these rules, under
the scrutiny and influence of an investigative finance industry,
indeed helps explains the feeling of 'insecurity' by many in the
workforce. The paper concludes with a reassessment of traditional
Gross Domestic Product (GDP) measurement of national output and
reflects on an alternative calculation which, in the case of the
United States, shows that a revised community-oriented measure of
GDP may indeed reflect the fall of community well being, whereas
the traditional measures tend to imply a benign growth in
well-being as the adjunct to rising GDP.
In Australia, economists tend to rely on economic growth of at
least three per cent per year (3% pa) to contain rising
unemployment, let alone reduce unemployment(1). This rate of growth
is needed merely to offset the combined effects of growth in the
labour market and rising productivity.
Productivity, however, is generally regarded as being difficult
to measure because a) of giving a value to new capital stock
(capital productivity) and b) when agricultural and manufacturing
industries decline relative to the growth of the services
industries, the task of actually measuring outputs (eg the growth
of financial services) against inputs become harder to
Nevertheless, the question of how to achieve higher levels of
productivity has bedevilled public debate since the early 1970s
when the 'oil shocks' (significant oil price rises) affected the
economics of production in the industrialised economies. Over the
post-war period economies in Japan and Europe were reconstructed
using modern plant and technology. Since then, the industrialised
economies have had many of their markets challenged by the growth
economies of Asia.
Improvements to capital and technology and education investments
are the essentials. There is no question that economists correlate
improving productivity and economic growth. In a nutshell, rising
productivity means that the same level of output can be produced
with a decreasing number of inputs, releasing these resources to be
put to other purposes. This can also be achieved by improvements to
the way capital is used through work organisation. To take
advantage of new technologies, investment in human capital through
education and training represent the prerequisites for improving
labour productivity. Reducing inputs, most often labour inputs, is
one method which can improve productivity but does it always
generate economic growth?
When the (no longer needed) resources have been put to other
purposes, on a successful basis, the result is to increase an
economy's production of goods and services - ie to increase
economic output and with it, jobs. That having been said, improving
productivity by itself can be regarded as a double-edged sword.
Without economic growth, improving productivity displaces labour,
since last year's level of output can be produced this year with
less labour inputs. This is what economists mean when they say: '
(the) differential between output and employment growth reflects
differential rates of growth in labour productivity'(2).
Without improving productivity, the opportunity of cutting back
on the resources currently being directed towards a certain level
of production is lost. In turn, the ability to diversify production
and undertake the production of new goods and services is also
limited. Or, put another way, without increasing productivity, the
economy may stagnate.
But how to achieve growth, rising living standards and improving
or rising productivity while trying to increase employment (or at
the least, not exacerbate unemployment)? This is entree for the
role of downsizing the operations of enterprises (including public
sector enterprises) and the contribution made to the debate by an
influential economist, Stephen Roach, both as a proponent of
downsizing but now a convert to what might be called 'considered
However, the debate over corporate restructuring has always
incorporated the views of those who doubted the value of a massive
shake-up to an enterprise's activities, in that the loss of skill,
corporate memory and loyalty as well as the loss of morale deplete
an enterprise's ability to innovate and produce quality products
and services(3). Another influential corporate planner, Professor
Peter Drucker, has also criticised over-reliance on downsizing with
his comment: 'we are seeing too many amputations before diagnosis'.
His view, based on US evidence of the results of downsizing, is
that too many staff cuts in corporate restructurings have been
ill-considered and even inappropriate(4).
In the 1980s corporate downsizing was proffered as a strategy to
restore high productivity, and possibly to restore high economic
growth rates. Corporate downsizing is a term which covers a number
of managerial practices but predominantly relies on job-shedding as
a means to cut costs and to move the operation into profit-centres.
A downsizing strategy may require a company to rationalise these
centres by improving the technology of particular facilities while
downgrading (or eliminating) the roles of others.
For those operations that remain, their activities will be
divided into a series of 'core' and 'non-core' activities. The core
activities reflect the central purpose of the enterprise and are
responsible for generating profits. Core activities require highly
skilled and loyal senior staff. Non-core activities (eg office
cleaning, transport and stores etc) are considered not central to
the company's operations and are often sub-contracted. Sub
contracting almost always results in lower remuneration, conditions
and job security standards for (the often same) employees who
performed those functions prior to downsizing(5). In its more stark
form, corporate downsizing (ie within a firm) thus relies on
job-shedding to raise profits thereby improving the attractiveness
of a company's shares. It may be that employment does not always
inevitably fall. Nevertheless the strategy is based less on the
company developing quality in its products and services, and
relying less on developing products from research and development
In May 1996, the conventional wisdom supporting corporate
downsizing could be seen to have been delivered a blow when a
foremost proponent, Stephen Roach, criticised the practice by way
of a memo to clients of the Morgan Stanley bank.
Mr Roach is a leading US economist. He has worked for the US
Federal Reserve Bank and currently is a chief economist with the
financial institution Morgan Stanley. He has been a leader of the
school of thought which promoted a 'productivity led recovery'
using corporate downsizing as a means of retaining business
competitiveness. In fairness, he assumed that the resources
released would be used to boost the role of the services
Nevertheless, Mr Roach has reassessed his views, conceding on
Lateline that without getting 'more out of more'
(ie more productivity out of growing output), the
former approach only hollows out companies without providing
general economic growth(6). The text of his memo reads:
For years I have extolled the virtues
of America's productivity-led recovery. While I think its safe to
say that such a scenario has become the new mantra for US
businesses in the 1990s, I must confess that I am now having second
thoughts ... these doubts have caused me to rethink many of the
glorious consequences that I have long argued would be forthcoming
in a truly productivity-led recovery ... Slash and burn
restructuring was not a permanent solution. Tactics of open-ended
downsizing and real wage compression are ultimately recipes for
He further added:
If all you do is cut you will be
eventually left with nothing, with no market share. The myth has
been there and I'm guilty of having perpetrated the myth - of the
virtue of boosting companies by remaking the corporate entity into
a leaner, more flexible and competitive organisation. This was
music to the ears of investors but at the end of the day, though
some of the things that were done were good, it was wrong.
Its been a powerful learning experience for me because it takes
me to the core of what I have been schooled in. And that is that at
the end of the day you can create wealth only if you've got a
corporate sector that has its act together and takes a long-term
strategic view. The debate itself is a healthy one. It goes to the
core of what it takes to compete and boost standards of living. Do
we get there by growing? Or - which is what we've been doing - by
hollowing out companies?(8)
The media reports of Mr Roach's revision have played up the 'he
got it wrong' line and the following commentary has been
Wall Street's leading guru of
'downsizing', the cult of corporate shrinkage that is wiping out
millions of jobs around the world in the name of efficiency has
decided that he got it wrong.
Stephen S. Roach, the influential chief economist at Morgan
Stanley declared last week that relentless cost cutting was bad for
business. If you compete by building you have a future he
said, if you compete by cutting you don't - the pendulum has
swung back from capital to labour. Companies will have to hire
more labour, pay them better and treat them better.
The theory of downsizing swept the world in the 1980s providing
business with an intellectual justification for ruthless
cost-cutting which left millions out of work and millions
overworked. Sacking staff enabled companies to dramatically improve
their bottom lines without selling more products(9).
It was not surprising that the conservative economic journals
would accept such a juxtaposition without challenge. The
Economist for example has been cautious about Mr Roach's
statements, arguing that America has produced jobs at a greater
rate than for most OECD countries, that 'Mcjobs' are better than no
jobs and that any economy takes time to adjust to restructurings.
This excerpt from The Economist expands the debate:
Two schools of thought about American
productivity have recently been popular. The first noting that
America's output per worker is rising only slowly (less than 1% pa
since 1980) attribute this not to a dearth of investment (a
plausible cause) but to 'hollowing out'. Productivity in parts of
manufacturing has grown at a reasonable pace, the argument goes,
but the workers shed in the search for growing efficiency have been
forced to take low-productivity 'Mcjobs'. Productivity in the
economy as a whole has grown far more slowly.
A second school of thought has taken a more optimistic view. The
productivity figures for services (now much the largest part of the
economy) are misleading. It is impossible to count the output of a
law firm, say, in the way you count the output of a car plant.
Official figures for output of services show a marked increase, yet
it is clear that technology has transformed the amount of work that
many workers can do and output and productivity in such industries
have most likely been rising faster than statisticians think.
This week, one of the champions of this second school defected.
Stephen Roach, a highly regarded pundit at Morgan Stanley, an
investment bank, announced that he had been born again as a
pessimist. As a result, the view that America is failing now looks
more like a consensus than it did before. But is that view
Mr Roach's reasons for changing his mind are unclear. He says he
now fears that restructuring may yield only once-and-for-all gains
in output, rather than acting as a platform for persistently faster
growth in future. So it may prove. But this is not, as he appears
to think, to endorse the 'hollowing-out' school. What is
productivity growth if not an endless stream of 'restructurings' of
different kinds? If the pace of restructuring has accelerated
thanks to technology or other causes - and nobody appears to doubt
it - then one would expect productivity growth to accelerate in due
course for the same reason. This may not last forever, but what
Three other points also suggest that America's spirits should
not flag too much. First, growth in output per worker is indeed
likely to be understated in official figures ... America like many
other countries is probably doing better than it thinks. Second, it
would not in any case be unusual if the recent burst of rapid
technological change turned out for a time to be followed by a
sluggish growth in output. Economies take time ... to move
displaced workers into new jobs, and more time still to move them
into better jobs ... Third, in this crucial task of keeping workers
employed in the interim, America's record, although far from
perfect, is much better than that of most other rich
Anthony Sampson recently canvassed similar issues to Stephen
Roach in his book Company Man, and many of the political
consequences of downsizing heralded by Mr Roach had been reviewed
in that work(11). But Sampson's approach and emphasis are quite
different from that of Stephen Roach.
Sampson's approach is to question the values and principles
which corporations have adopted, and looks at downsizing and
privatisation from this perspective. His approach reveals a more
delicate mix of policy options being offered and traded in the
broader political economy. For Sampson, it is the role of status of
senior management which is the key variable. In the 1960s,
corporate management 'hoarded' employees because the status of
management depended on the numbers of employees under their
control, with the result that companies were over-staffed. In the
1990s, managerial status is often associated now with the numbers
of employees a manager retrenches. Sampson argues (not
persuasively) that the salary of managers is now more aligned to
the ability to fire people 'The more people he fires, the more he
is likely to be paid. That's a very worrying equation'(12).
As with Stephen Roach, Sampson portends a political blacklash
from electors over downsizing/job loss for the reason that the pace
of change cannot be absorbed by the electorate. The political
outcome, he says, could easily be of a fascist mould, although one
hastens to add that Sampson is not the first to herald such a
direction. Writers such as O'Connor have also canvassed the likely
political responses to corporate pressures for reductions in public
Sampson argues that in the global marketplace, employers can
pursue profits by substituting casual labour for permanent labour.
The result is unemployment as in Europe or the loss of permanent
jobs for casual forms of employment as in the United States. Not
atypically, Sampson considers that the power of corporations has
increased relative to the role of government; this has been brought
on by the loss of control over nationalised industries by
governments and their reluctance to be involved in managing
So where is the mechanism to deliver full employment? The
problem according to Sampson is that:
corporations don't have the long term
responsibility for stability and families that government used to
have, so that has led to much less secure existence for people.
That insecurity is growing the whole time because companies don't
want to be landed with the responsibilities for full employment or
the old paternalistic responsibilities the corporate [world] used
He contends that governments are moving away from their
commitments to providing pensions and welfare. Added to this there
is the casualisation of labour which ultimately acts to the
detriment of companies since the loyalty component in the
employment equation no longer functions. Sampson concludes that the
Germans and the Japanese have better corporate growth models since
corporate practices of both give importance to training, job
security and employee welfare. One study of restructurings
conducted in Australia has also concluded that the conduct of these
exercises has, in general, been reasonable from the viewpoint of
staff, but staff can become resentful when the exercise is repeated
often, since this indicates that management do not have a
The debate over downsizing and worker insecurity, located as it
is now in the context of this year's US elections, has resulted in
a barrage of responses (similar to the content of the extract
quoted from The Economist) countering the 'pessimist' view
that job security is worse, that wages are stagnant and
The controversy brought about by Mr Roach's stance leads into
the wider debate of economic measurement and perceptions of
security and improving living standards. This issue also touches on
major political developments such as the challenge of Pat Buchannan
to Bob Dole for nomination as Republican presidential candidate. Mr
Buchannan has campaigned on the issue that free trade is injuring
the interests of working class Americans; that NAFTA is detrimental
to workers' interests and so-on.
A number of reasons are often given for stagnating living
standards. These include the deleterious side of free trade and
globalisation of production. However, there is now also a focus on
the changing rules of corporate governance to explain perceptions
of job insecurity and depressed real wages.
Studies by Gary Burtless, an academic with the Brookings
Institute in Washington, have attempted to account for various
influences on stagnating living standards and 'insecurity'. He
argues that there is a new pressure on companies to downsize in the
1990s, when for the same return on assets in the 1960s, the
pressure would have been withstood.
The change in the 1990s, he argues, comes from the
information-gathering function of the finance and security
industries. In the 1960s, when (US) firms responded to falling
demand, they laid off staff, then recalled them after the
recession. In the meantime wage negotiations addressed the needs of
workers who would remain loyal to the company and the resulting
wage levels were somewhat less driven by corporate profitability
demands. However Burtless believes that the rules applying in the
1960s no longer operate:
... the market for corporate control,
and innovations in the market for corporate control, have now made
it much more difficult for managers, except in selected firms, to
think that they are immune from what the rest of the financial
markets thinks of what they are doing. So, for example, if a firm
has been running its airline or its manufacturing company in such a
way that they are paying their workers comparatively generous wages
and they're earning decent profits, that kind of management method
could have continued indefinitely in the 1950s, 1960s or 1970s. In
the 1990s, ... managers know that unless they adopt a cost-saving
measure that makes their corporation even more profitable than it
has historically been, they might be removed, their control of the
corporation might end because of a hostile takeover bid that wrings
costs out of the corporation that it could have lived with in the
and in respect of cost cutting, Burtless recalls that:
a major cost cutting exercise
conducted by a major corporation in the 1960s was often interpreted
by financial markets as an indicator that future sales were going
to shrink and that the company was in real trouble. Nowadays, firms
that are clearly quite profitable and have healthy cash balances
often undertake big cost-cutting measures, in which thousands often
are slated for removal from company payrolls, and the market
interprets that very favourably. It takes it as an indication that
the firm has a management committed to wringing costs out of the
company, thereby raising its profitability regardless of its
prospects for further growth(18).
While the contributions of Roach, Sampson and Burtless help
explain perceptions of worker anxiety, they do not provide
recommendations for a more secure and equitable economic direction
given the consequences of downsizing. Moreover the contention of
Anthony Sampson that there may arise forms of fascist political
solutions because of the opposing responses to (but ongoing
pressures for) downsizing, is hard to sustain.
One need only to look at the international demand for the
observance of labour standards by the 'new economic tigers' to
appreciate that an equally legitimate development from the
'free-trade and loss of jobs' debate in industrialised countries,
are pressures (both internal and external) for democratic rights.
These include bans on forced child labour, the right to organise
and to collective bargaining. In this process for reform, as
Kapstein has observed, organised labour in the industrialised
countries has given significant support(19).
The downsizing debates also reflect an over-reliance on
conventional GDP measures as being accurate indicators of community
well-being. The problems of measuring productivity improvements in
a services dominated economy have been well reported. In the view
of Cobb, Halstead and Rowe, the use of national accounts (very much
a post-war development) has given governments and corporations an
ability to plan their economies, principally through focusing on
areas of slack demand and specifically remedying these weak
The accounts enabled the nation to
locate unused capacity and to exceed by far the production levels
that conventional opinion thought possible(20).
But, these authors also make reference to the caution that the
'father' of the National Accounts, Simon Kuznets urged in 1962:
Distinctions must be kept in mind
between quantity and quality of growth, between its costs and
return, and between the long and the short run ... Goals for 'more'
growth should specify growth of what and for what
Steps have been taken by the major economic institutions
including the OECD, World Bank and the IMF to to revise the
methodology of national accounting. This relatively recent work
suggests the addition of 'satellite' accounts to the main accounts
data which would reflect certain components of GDP as costs, eg
pollution, congestion and so-on(22). Developing this theme further,
Cobb, Halstead and Rowe using data already available, have devised
a replacement methodology for US GDP measurement. This is called a
'Genuine Progress Indicator' (GPI): 'The result is a new index that
gets much closer - not all the way, but closer - to the economy
that people experience(23)'.
The index commences with US GDP consumption data adjusted for
income distribution (if the whole population has not benefited from
rising production, then this will be reflected in the GPI), and
with other activities added, such as the value of housework and
community work but with other costs subtracted such as pollution
costs. As well, the costs of crime prevention are counted as a plus
in traditional GDP accounting whereas most people regard them as
cost, so the GPI counts them as a cost. The costs of defending
individuals from the degradation of the physical environment are
also discounted as well as the costs of resource depletion.
Similarly treated is the loss of leisure brought about by people
having to work long hours/two jobs.
When the GDP of the United States is correlated to GPI over the
post-war period, both indexes move upwards until 1970. From there
GPI shows a 45 per cent decline, while GDP continues to rise. (Over
the entire period GDP as conventionally measured more than
doubles). The authors therefore raise the possibility that the
benefits of economic activity since 1970s have actually been
outweighed by the costs. They are nevertheless confident that this
method better explains people's perceptions of their well being,
and for many there is a lack of well being not reflected in the GDP
The debate on the costs and benefits of downsizing can be seen
to add to the demands for reviewing the traditional measures of
economic progress. The debate reflects community dissatisfaction
with employment and social 'security' - in the broadest sense.
Roach's contribution has been to add to a convincing voice to those
who hold that deep cuts to corporate staff, functions and products,
in the main, contribute to a loss of market share and over the long
term limits the potential of the economy to expand - reinforcing
the perceptions of employees of their employment insecurity.
A likely response in the particular case of downsizing, may take
the form of policies designed to make corporate practices conform
to codes or standards. As Kapstein has observed:
The forces acting on today's workers
inhere in the structure of today's global economy with its open and
increasingly fierce competition on the one hand and fiscally
conservative units - states - on the other. Countermeasures,
therefore, must also be deep, sustained and widespread. Easing
pressures on the 'losers' of the new open economy must now be the
focus of economic policy if the process of globalisation is to be
sustained (but) the dogma of restrictive fiscal policy is
undermining the bargain struck with workers. States are basically
telling their workers that they can no longer afford the postwar
deal and must minimise their obligations(24).
In an Australian context, the procedures developed for coping
with redundancies in the early 1980s indicate a community standard
in response to such restructurings. The NSW Government passed
legislation to reinforce employers' commitment to job security and
in 1982 the NSW Industrial Commission set standards on termination
and redundancy pay. These standards were largely maintained in the
Termination, Change and Redundancy case of the federal
industrial tribunal in 1984, and employers were required to assist
redundant employees to find new employment and pay redundancy
payments according to years of service, and age, up to a certain
The contributions of Roach, Sampson and Burtless assist in
explaining an apparent contradiction, observed in industrialised
economies, which is the persistence of feelings of insecurity and
the 'feel bad factor' among lower and middle income earners,
notwithstanding economic data which reports 'growth'. It is thus
important to ensure that managers in the private and public sectors
are aware that the consequences of downsizing are not necessarily
costless for displaced staff and their communities, and that
substantial downsizing constrains the option of developing the
company's share of market growth and could well be detrimental to
- See for example Restoring Full Employment, a Discussion
Paper by the Prime Minister's Committee on Full Employment
Opportunities (AGPS 1993) p.51 which sought annual growth rates of
4.5% to reduce Australia's unemployment rate.
- See 'The Australian Labour Market - March 1996' in The
Australian Bulletin of Labour March 1996 at p.10.
- See for example 'Plant Closings: Is the American Industrial
Relations System Failing' by K.Kovach and P.Millspaugh in
Business Horizons March-April 1987. This article argued
that the social and personal disruptions caused by plant closures
were so vast that US collective bargaining was not able to handle
the consequences making it inevitable that these issues were be
referred to the Congress, the courts and the National Labour
Relations Board for resolution/assistance.
- 'Smaller may not be so beautiful', The Australian Financial
Review 10 June 1994. This report referenced a study in the
United States of 140 000 factories conducted for the US Census
Bureau. It found that 55% of productivity gains came in factories
which reduced their workforces, while the other 45% of gains came
in factories which increased their workforces
(over 10 years). The conclusion was that most corporate downsizings
had failed to produce what was expected, and that managers 'would
have planned their big moves far more carefully'.
- One local example of this consequence was reported in New South
Wales in an industrial dispute over redundancy pay for cleaners who
were placed in employment with cleaning contractors after the
Government Cleaning Service was privatised. The NSW Industrial
Commission awarded $25 million to 7 500 workers because they had
lost 'secure employment', with the relevant union claiming that the
cleaners received inferior entitlements in their new employment,
Sydney Morning Herald 30 August 1994; see also the
Industry Commission's report No. 28 Competitive Tendering and
Contracting by Public Sector Agencies (AGPS January 1996)
P.178 & 389.
- 'Cuts that work' ABC Television Lateline 13 June
- 'Guru of downsizing admits he got it all wrong', The
Independent 12 May 1996.
- ibid and see also 'On down-sizing and stress - in or
out of work', The Canberra Times 19 May 1996.
- 'Productivity revisited', The Economist 11 May
- Sampson, A. Company Man The noted British writer
responsible for critical works on corporate control and power such
as The Sovereign State of ITT, The Seven Sisters and
The Arms Bazaar.
- An excellent summary of Company Man can be found in
'The downside of downsizing', The Bulletin 23 April 1996
(article by John Connolly)
- O'Connor, J. The Fiscal Crisis of the State - St
Martins Press 1973.
- The Bulletin 23 April 1996.
- 'Cut once to keep morale high', The Australian Financial
Review 11 June 1996.
- See for example 'The capitalism contradiction' by Robert
Samuelson Australian Financial Review 17 May 1996 who
claims that 'Companies need stable workforces, precisely because
excessive turnover raises recruitment and training costs' and that
in (the US), 'In 1983, 38% of men over 25 had been with their
current company for 10 years or more; by 1991 it was 36%'.
- 'Why wages are'nt growing', interview with Gary Burtless in
Challenge, November-December 1995.
- Kapstein, E. 'Workers and the World Economy', Foreign
Affairs May/June 1996.
- ibid. p.63.
- ibid. p.67.
- See Parliamentary Research Service: Background Paper 10 of
1994: Greening the National Accounts: Possibilities, problems
and Perspectives by Michael Warby.
- ibid. p.72.
- Kapstein, op.cit. p.17.