As I mentioned last week, I often get asked, “So, Harry, what are the questions most frequently asked by your Kellogg students and executives during your classes and presentations?”
So, since I have a resolution to send out a post every Monday, here’s the second installment in my new “Ask Harry” series!
ASK HARRY #2
“Harry, what is your reaction to the significant number of layoffs that have been announced during the last several months? What does it say about the current state of the free market capitalist system? Is it broken?”
These questions came up several times this weekend during the Kellogg Global Leaders Symposium at Kellogg EMBA offices in Coral Gables, Florida. As you would expect from me, I will share some “opinions” in my attempt to address these questions from a BALANCED PERSPECTIVE.
On one hand, it is very disappointing to see the number of people that are being laid off. Let’s not forget that the damage of these layoffs isn’t limited to the individuals who are laid off; in most cases layoffs impact entire families. It is true that the current economic environment may require some companies to significantly reduce expenses, but in my opinion these layoffs raise several questions worth addressing:
- Why did some of these companies hire as many people as they did during the last year? What was the flaw in their planning process? Did they not assume that a recession was a real possibility? Just to be clear, it is not always easy to predict the future (to quote Yogi Berra, the famous New York Yankees catcher, “Predictions are difficult, especially about the future” 😉) However, given the increasing size of the U.S. deficit, the war in Ukraine, and significant global supply chain issues, as I often say when people tell me they’re surprised: “I am surprised that you are surprised!!!”
- Okay, regardless of whether companies planned well or not, as a former CEO and CFO I understand that expenses need to be cut. However, did these companies examine all of the other possible ways to reduce expenses in addition to layoffs? As one of my colleagues and a senior executive of a large company stated, “Maybe they could have reduced executive compensation of senior management to minimize the number of people that would be laid off?”
“There’s still more job openings than there are unemployed people by about three and a half million.”
Wall Street Journal
After Big Tech, Layoffs Spread to Other Corporate Giants, 1/26/2023
Okay, now to address the question of what does it say about the current state of the free market capitalist system and whether it is broken. My opinion may surprise you: I believe the free market capitalist system continues to be the best system in the world and is definitely not broken!! Here’s why:
As stated in the WSJ article After Big Tech, Layoffs Spread to Other Corporate Giants, “There’s still more job openings than there are unemployed people by about three and a half million.” It is true that many of the current job openings may not match the job requirements of the people being laid off immediately. However, in most cases, over a relatively short period, the matching works reasonably well. Why do I say that? Here’s an amazing fact: If you look at the millions of U.S. jobs that have been eliminated, moved overseas, or layoffs across all industries over the past 50 years, the U.S. unemployment rate is almost always somewhere between 3.5% and 4.5%. Said another way, as some jobs change or are eliminated, other new jobs are created.
The more flexible and fluid the system, the easier it is for the system to function. In countries where laws make it difficult to layoff workers, rather than helping the process, it encourages companies to invest in other countries. We do need to develop job training and education programs to aid those that are laid off. Nonetheless, it is clear that the free market capitalist system works better than any other alternative.
A major problem that seems to be escalating is the ratio of CEO pay to average worker compensation. It is now about 400 to 1. In 1965 it was 20 to 1.
Unless this cycle is reversed, there will be a price to pay.
Professional positions are highly specialized with education and advanced credentials. When positions and company departments are eliminated it is a huge time/money commitment for a few years to retrain for new positions available.