The Impact of Layoffs on Productive Efficiency

Although extant research has exhibited substantial progress in elucidating the phenomenon ofbusiness layoffs, their consequences on firm performance remain unclear. This researchattempts to provide evidence from two perspectives. First, layoffs tend to be associated withnegative performance in the short run because an initial strongly adverse effect results fromthe breach of the psychological contract, and economic benefits require time to take effect.Delayed positive economic benefits would be countered by strong negative effects of thebreach of the psychological contract. However, in the long-run, the outcomes of layoffs tendto be associated with positive firm performance because the psychological contract is repairedduring the post breach and coping process, and economic benefits of downsizing graduallyrise to the surface over time. Therefore, distinguishing short-run and long-run effects will helpunderstand the impact of layoffs. Second, while extant studies have focused on the effect oflayoffs on financial performance, because layoffs directly change the labor input of theproduction process, analyzing the impact of layoffs on productive efficiency would facilitateour understanding of the outcomes of layoff strategies. This study will use the stochasticproduction frontier model to examine the impact of current-year and past-year layoffs oncurrent-year productive efficiency, which represent the short- and long-run effects of layoffsrespectively. Furthermore, a strategic choice model of layoffs will be estimated, and theresults of which will be integrated into the stochastic production frontier model to considerthe nature of endogeneity of layoff strategies.