Layoffs: Painful but not disgraceful
Mass layoffs are very common in industrialized economies. As a matter of fact Bureau of labour statistics of the U.S government provides data on layoff actions every month. In case of U.K, national statistics department provides data on unemployment rate and claimant count on a regular basis. It does not deserve to be a national headline there and does not create much panic either. In particular layoffs are less significant events than unemployment. Why it is so? Because labour is an input in the production process and it becomes redundant, if not worthless, as demand slackens. Let’s look at recent layoff data of U.S. In the month of August, 2008 there were around 173,955 initial claimants in 1,772 mass layoff events! A claimant means a person who has applied for unemployment insurance but is actively seeking work. An event is registered when fifty or more initial claims for unemployment insurance benefits are filed against an employer during a 5-week period. In U.K the number of claimants is far higher – more than 900 thousand in month of August.
Figure 1: Mass layoff events in U.S - Sep, 2004-Aug, 2008
Source: Bureau of labor statistics, U.S
Figure 2: Growth rate of Mass Layoffs in U.S
Source: Bureau of labor statistics, U.S
Well, for us these numbers may be incredibly high but for a matured capitalist system, at best these could be systolic and diastolic readings of the economy which do not always require an aspirin dose. Only when mass layoffs result in higher unemployment, it could solicit some fiscal or monetary interventions. In August, U.S has 6.1 percent unemployment up from 4.7 percent a year earlier. That is what makes a headline. Only when unemployment crosses the natural rate of unemployment (4 – 5 %), it raises the eyebrow. Now we are back to the first question – why it is so in a capitalist system? Let’s understand the basics.
Capitalism thrives on profits and it must fulfill the first order condition of that which is the equalization of marginal revenue and resource cost, to survive in business. But, the decision to operate is a function of shut-down price – that is the price when the firm decides not to produce as the total variable cost of producing that output exceeds the total revenue derived from selling it. While this simplistic version of profit maximization condition may not be the final condition in all market forms, the essence holds – one must earn more than one spends in a business to survive. There could be cyclical, frictional and structural unemployment in this model. The cyclical unemployment is related to the business cycle phenomena – investment rate goes down due to gloomy business environment which results in labour unemployment. The frictional unemployment is very transitory in nature and could be described as a wait unemployment or seasonal unemployment. When a person moves from a company to another company, there may be an intervening period during which he remains unemployed. Similarly someone might have opted for a seasonal work which keeps him busy during certain months in a year and free from work in the remaining months. Structural unemployment arises due to skill or location mismatch. A new software language may lead to obsolescence of the old workers and till the time they are trained in a modern language, they may remain unemployed. Similarly, there may be a reserved army of IT at Bangalore but demand for them may be more at Thiruvantpuram. The changing dynamics of an economy creates such an unemployment scenario. Therefore, unemployment in one form or other always arises in a free market economy which is in a constant endeavour to adjust and readjust with changing dynamics.
Now let’s get back to the core issue that has become headline in the Indian media. Jet had laid off 800 plus employees while several others were in the queue. It has been done with a motive to rationalize costs and keep the airline afloat. As per the audited financial results of Jet, iit has incurred a loss of Rs. 253 crores post tax in FY08. It has incurred losses of Rs. 143 crores in the first quarter of FY09. Moreover the industry traffic growth rate has fallen from 11.1 percent in Q4FY08 to 4.2 percent in Q1FY09. The ATF which is around 50 percent of airline operating costs has increased by 52 percent between February, 2008 to July, 2008. Jet with the average headcount of 13,403 between April-June, 2008 with 85 fleet has to face the brunt of spiralling costs. Its workforce has increased by 24 percent between Q1FY08 to Q1FY09. Being bewildered by the international and domestic macroeconomic developments, it has taken an unprecedented step in recent times – that of retrenching 800 plus employees. As per the news it was in the process of manpower reduction by 15%. The basic economics of business infact won’t disagree with Jet’s move. We all do cost cutting or rationalize our personal expenses (politically correct word!) when faced with a tight financial situation.
Before dealing with the post-retrenchment development, I would like to spell few words to deal with such a situation from both macro and micro perspectives. Being laid off is an unfortunate event but certainly not a disgraceful one – especially when it is due to exogenous factors. One has to accept the reality that business cycle is an integral part of the capitalist development. India can no more take respite by ascribing dismal growth to ‘act of God’ which very often we do by regressing economic growth with respect to rainfall index. We are very much in the club of capitalist countries courtesy Manmohan Singh who has just made us a member of another club – that is called nuclear power, very recently. Coming to treatment, we need a trauma care centre – unemployment insurance. When you have asked people to join rafting, you have to ensure that everyone wears a lifesaving vest. It is there in U.S, in U.K and other western European nations. Least to speak in U.K, they give you additional allowance if you have a pet and become unemployed. India has to do this before it is too late. Even in the absence of any business cycle syndrome, otherwise also, enterprise restructuring would produce some temporary jobless people for whom some sort of insurance mechanism must be put in place. Whether it would be a complete transfer of income or from a contributory premium fund at a national level would need to be explored.
At the micro level also, people coming to the job market must be prepared for it. As the wise advice goes – do not put all of your eggs in one basket. One should possess multiple skills and in really bad times, one should not hesitate to jump to the periphery, may be, till the tide get back its level. For example, if you are a software programmer, you should learn a few other languages rather than being a specialist in one as you do not know when that lnguage would get obsolete. Sometime ago, Business Standard bore a headline that there is a scarcity of Ph.D s in Economics. Even if one discounts the academic virtues of being a Ph.D, it makes sense in terms of diversifying your risk. Similarly people in the aviation industry should learn the basics of hospitality services in other areas like hotels, clubs or hospitals. While I understand the predicament of most of the poor Indians in terms of bearing the massive expenses of a single professional course, it makes sense to aspire a little more than what one can manage. Maybe one should finish a Masters degree course even if one thinks of employment after a Bachelors.
Now let’s close the story. We all know that Jet has taken back the retrenched people. It has ended as a high octane melodrama where chairman of Jet Mr. Naresh Goyal could see his daughter among the sacked employees. Considering the high emotional quotient of Indians, there is no reason for me to disbelieve Mr. Goyal’s version. The conscience of the capitalist has surpassed (rather transcended!) balance sheet calculations. However, the basic principles of capitalist system must be respected in letter and spirit that is – marginal revenue should be equal the marginal cost atleast. There is no excuse to avoiding that. After all, in a capitalist system, companies exist to maximize share-holder value.
(Views are personal)
Figure 1: Mass layoff events in U.S - Sep, 2004-Aug, 2008
Source: Bureau of labor statistics, U.S
Figure 2: Growth rate of Mass Layoffs in U.S
Source: Bureau of labor statistics, U.S
Well, for us these numbers may be incredibly high but for a matured capitalist system, at best these could be systolic and diastolic readings of the economy which do not always require an aspirin dose. Only when mass layoffs result in higher unemployment, it could solicit some fiscal or monetary interventions. In August, U.S has 6.1 percent unemployment up from 4.7 percent a year earlier. That is what makes a headline. Only when unemployment crosses the natural rate of unemployment (4 – 5 %), it raises the eyebrow. Now we are back to the first question – why it is so in a capitalist system? Let’s understand the basics.
Capitalism thrives on profits and it must fulfill the first order condition of that which is the equalization of marginal revenue and resource cost, to survive in business. But, the decision to operate is a function of shut-down price – that is the price when the firm decides not to produce as the total variable cost of producing that output exceeds the total revenue derived from selling it. While this simplistic version of profit maximization condition may not be the final condition in all market forms, the essence holds – one must earn more than one spends in a business to survive. There could be cyclical, frictional and structural unemployment in this model. The cyclical unemployment is related to the business cycle phenomena – investment rate goes down due to gloomy business environment which results in labour unemployment. The frictional unemployment is very transitory in nature and could be described as a wait unemployment or seasonal unemployment. When a person moves from a company to another company, there may be an intervening period during which he remains unemployed. Similarly someone might have opted for a seasonal work which keeps him busy during certain months in a year and free from work in the remaining months. Structural unemployment arises due to skill or location mismatch. A new software language may lead to obsolescence of the old workers and till the time they are trained in a modern language, they may remain unemployed. Similarly, there may be a reserved army of IT at Bangalore but demand for them may be more at Thiruvantpuram. The changing dynamics of an economy creates such an unemployment scenario. Therefore, unemployment in one form or other always arises in a free market economy which is in a constant endeavour to adjust and readjust with changing dynamics.
Now let’s get back to the core issue that has become headline in the Indian media. Jet had laid off 800 plus employees while several others were in the queue. It has been done with a motive to rationalize costs and keep the airline afloat. As per the audited financial results of Jet, iit has incurred a loss of Rs. 253 crores post tax in FY08. It has incurred losses of Rs. 143 crores in the first quarter of FY09. Moreover the industry traffic growth rate has fallen from 11.1 percent in Q4FY08 to 4.2 percent in Q1FY09. The ATF which is around 50 percent of airline operating costs has increased by 52 percent between February, 2008 to July, 2008. Jet with the average headcount of 13,403 between April-June, 2008 with 85 fleet has to face the brunt of spiralling costs. Its workforce has increased by 24 percent between Q1FY08 to Q1FY09. Being bewildered by the international and domestic macroeconomic developments, it has taken an unprecedented step in recent times – that of retrenching 800 plus employees. As per the news it was in the process of manpower reduction by 15%. The basic economics of business infact won’t disagree with Jet’s move. We all do cost cutting or rationalize our personal expenses (politically correct word!) when faced with a tight financial situation.
Before dealing with the post-retrenchment development, I would like to spell few words to deal with such a situation from both macro and micro perspectives. Being laid off is an unfortunate event but certainly not a disgraceful one – especially when it is due to exogenous factors. One has to accept the reality that business cycle is an integral part of the capitalist development. India can no more take respite by ascribing dismal growth to ‘act of God’ which very often we do by regressing economic growth with respect to rainfall index. We are very much in the club of capitalist countries courtesy Manmohan Singh who has just made us a member of another club – that is called nuclear power, very recently. Coming to treatment, we need a trauma care centre – unemployment insurance. When you have asked people to join rafting, you have to ensure that everyone wears a lifesaving vest. It is there in U.S, in U.K and other western European nations. Least to speak in U.K, they give you additional allowance if you have a pet and become unemployed. India has to do this before it is too late. Even in the absence of any business cycle syndrome, otherwise also, enterprise restructuring would produce some temporary jobless people for whom some sort of insurance mechanism must be put in place. Whether it would be a complete transfer of income or from a contributory premium fund at a national level would need to be explored.
At the micro level also, people coming to the job market must be prepared for it. As the wise advice goes – do not put all of your eggs in one basket. One should possess multiple skills and in really bad times, one should not hesitate to jump to the periphery, may be, till the tide get back its level. For example, if you are a software programmer, you should learn a few other languages rather than being a specialist in one as you do not know when that lnguage would get obsolete. Sometime ago, Business Standard bore a headline that there is a scarcity of Ph.D s in Economics. Even if one discounts the academic virtues of being a Ph.D, it makes sense in terms of diversifying your risk. Similarly people in the aviation industry should learn the basics of hospitality services in other areas like hotels, clubs or hospitals. While I understand the predicament of most of the poor Indians in terms of bearing the massive expenses of a single professional course, it makes sense to aspire a little more than what one can manage. Maybe one should finish a Masters degree course even if one thinks of employment after a Bachelors.
Now let’s close the story. We all know that Jet has taken back the retrenched people. It has ended as a high octane melodrama where chairman of Jet Mr. Naresh Goyal could see his daughter among the sacked employees. Considering the high emotional quotient of Indians, there is no reason for me to disbelieve Mr. Goyal’s version. The conscience of the capitalist has surpassed (rather transcended!) balance sheet calculations. However, the basic principles of capitalist system must be respected in letter and spirit that is – marginal revenue should be equal the marginal cost atleast. There is no excuse to avoiding that. After all, in a capitalist system, companies exist to maximize share-holder value.
(Views are personal)
Labels: Employment Insurance
posted by Manu at 7:38 PM
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