Elon Musk holds up a chainsaw onstage during the Conservative Political Action Conference on Feb. 20. (Photo by Nathan Howard/Reuters)
Employers have announced over 600,000 job cuts in 2025, the highest level since 2020, and many corners of the economy are hurting. Tech and retail layoffs are on track to hit numbers not seen since the beginning of the pandemic — and the government leads all sectors in job cuts this year, nearly all attributable to the cost-cutting effort of President Trump’s Department of Government Efficiency, or DOGE. More cuts are likely if the President’s “One Big Beautiful Bill” passes.
Layoffs have become a common business practice; the widely held presumption is that they lower costs and benefit organizations. But is this true? Research by social scientists shows there is little evidence that cutting jobs leads to stock price increases or higher sales and earnings. In fact, research indicates long-term performance actually declines after layoffs — which have negative effects on the physical and mental health of workers — and that there are other, more effective ways to increase efficiency and help ailing organizations get better.
There are several reasons why layoffs do more harm for companies than good. The first is that the causes of the usual, systemic problems that lead to business decline — from lack of fiscal discipline to poor leadership — develop over years, and aren’t solved by getting rid of employees.
The second is that layoffs cost money — severance packages, deferred compensation, and support services for departing employees. The third is that companies cut people, not work — which means layoffs lead to work disruption, lost productivity, lengthy learning curves, and other costs as surviving employees deal with new arrangements and an increased workload.
Successful organizations ward off such woes by being disciplined. They don’t allow themselves to get into a position where mass layoffs are necessary.
One company I worked for had a culture of strong cost controls. You didn’t add headcount or spend money without running a gauntlet of approvals to ensure the investment was addressing a strategic priority. As a part of a long-term planning effort there, my group helped classify company capabilities into critical (tied to competitive advantage) and support capabilities. We then classified all jobs into these groups. If the company was going to make new investments or hire more personnel, they needed to bolster its critical capabilities.
We also kept costs low in ways that were less disruptive to the workforce than layoffs. For example, we centralized support functions in finance, human resources, and information technology and/or moved them to lower cost locations and shifted headcount to third-party manufacturers. We often moved affected employees to open roles within the company or shifted their employment to outside vendors or partners to cut costs.
Successful companies also make strategic changes. They exit underperforming businesses, close less productive facilities, or sell off assets that no longer fit their strategy. And they often involve their employees in cost reduction efforts from the beginning. At this same company, my group created a program modeled after General Electric’s famous “Work-Out” program to reduce costs by bringing employees and managers together to address critical problems.
Similarly, suggestion systems and gain-sharing programs — which allow employees to receive a share of the savings they create — help employees feel personally invested in lowering costs. Research — my own and others’ — shows these efforts, and others like outsourcing and offshoring, have far less detrimental effects on employees than mass layoffs. Employees understand why these changes are being made.
But sometimes even successful organizations experience business disruptions and can’t avoid cutting jobs (e.g., a reaction to a global pandemic or aggressive tariffs). I’ve been involved in many of these efforts over the years — including at the same very disciplined company I worked for. When painful cuts are necessary, successful companies work hard to mitigate their ill effects.
Social scientists highlight four forms of justice that affect employee reactions to decisions like layoffs: distributive justice (are outcomes fair?), procedural justice (is the decision-making process fair?), interpersonal justice (are employees treated with dignity?), and informational justice (are explanations clear?).
One such effort at fairness came at Nokia, in 2011, when their mobile phone business failed, and they needed to lay off 18,000 people at home in Finland and around the world. Nokia had a painful experience restructuring after a plant closure in 2008, and they wanted to do better this time. They implemented a program called “Bridge” to ensure employees felt the process was fair and those who were laid off had a soft landing.
Overall, 85% of Finnish participants and 67% of global participants were satisfied with the program. Nokia’s layoffs were completed without labor actions in any of the 13 participating countries and without sacrificing product quality, new product sales and revenues, or employee engagement.
One way companies have incorporated distributive and procedural justice is to allow employees to make their own decisions via buyouts. In addition, instead of relying on periodic mass layoffs, companies make local organizations accountable for staying lean by implementing rigorous headcount controls. One company I worked for required units wanting to cut jobs to submit their proposal to a committee for approval, which made sure they followed the right process. My group also created metrics to help units identify employees to be cut, starting with length of service and performance, which reduced bias, ensuring managers used at least some of the same criteria and standards.
Interpersonal justice was also a central concern at this company. Before cutting employees, we tried to give them priority for open internal positions or place them with third-party partners. We relieved affected employees from current responsibilities so they could focus on their job search.
This company also created a career center to support employees, providing counseling services, helping with networking, outplacement, and resume writing, and running upskilling and reskilling programs to qualify for jobs in other areas within the company. Finally, the company provided those ultimately separated with generous severance packages.
Informational justice is the final key to making layoffs feel more fair. Where I have seen this done well, companies create a dedicated team to manage communications. They identify stakeholders, craft key messages, and use multiple media to deliver messages (in-person and virtual meetings, town hall and one-on-one meetings, presentations, emails, videos, etc.). And managers and HR staff are trained to have local discussions with their staffs and those affected.
No one likes layoffs — not the managers who carry them out or the affected employees. But preventing them, or managing the process well, can set people and companies up for continued employment and success in the future.
Alan Colquitt is an organizational psychologist, advisor, and consultant, and a former talent management executive at Procter & Gamble, Eli Lilly and Company, and John Deere. This was written for Zócalo Public Square, an ASU Media Enterprise publication.
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