The Virtue of Employee Layoffs
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The Virtue of Employee Layoffs

by Yaron Brook and Don Watkins | September 06, 2012 | Forbes.com

A CEO stands in front of his crumbling, century-old factory and speaks to his employees. “I promise that no matter what, I will never renovate this place. No matter how many worn-out items break, no matter how much our out-of-date machinery slows us down, no matter how many people tease us for clinging to fax machines over email, I will keep this factory going as-is. It’s time to embrace the inefficient.”

How long do you think a company operated in such a fashion would last? How long do you think its employees would have jobs? 

Everyone understands that in a competitive economy, businesses face an ultimatum: maximize efficiency or die. But although few today would demand that a CEO tolerate an unproductive factory, the notion that a CEO has a duty to maintain unproductive jobs is sacrosanct.

“You’re fired.” Two words that were unpleasant even before they were associated with Donald Trump. Losing your job can be incredibly painful, particularly in today’s economy, where Washington’s Byzantine regulatory regime has kept unemployment near double digits. 

But keeping employees who are hurting a company’s bottom line isn’t good for anyone — not even the employee whose unproductive job is (temporarily) allowed to weigh down the enterprise.

It’s a lesson that is clearly needed in the wake of recent attacks on private equity firms, which profit by making other companies profitable. Mitt Romney has been excoriated because his firm, Bain Capital, sometimes acquired companies that could only be made attractive to lenders and buyers by laying off significant numbers of employees.

Why is this even controversial? Because we have a weird double standard. When an employee leaves a company for greener pastures — maybe higher pay, maybe more satisfying work, maybe a more pleasant commute — nobody complains. Of course he should do what’s best for him. 

But when a business does the same thing? When it judges that some jobs are draining profits and need to be cut? Then it’s as if some nefarious sin has been committed.

Well, if Bain thought shedding those jobs would foster its bottom line, then why shouldn’t it have done so? A business exists to make a profit for its owners. That’s why owners and lenders risk their wealth investing in companies to begin with. No profit motive, no businesses — and no jobs.

A productive employee adds value to the company over and above what it costs to retain him. A good salesman may get paid a hundred grand a year. But if he brings in two million dollars in business? Small price to pay.

When it comes to the employee who costs more than he brings in, though, laying him off is as necessary as replacing out-of-date machinery. It doesn’t necessarily mean the employee is incompetent — often it’s the job itself that is not productive. Perhaps you’re the greatest C++ programmer around, but if your company’s customers start demanding programs written in Java, then from an economic standpoint, your role at the organization is no longer productive. You’re hurting your company’s profitability, not helping it.

Small comfort to the guy who finds himself out of work, though, right? Actually, it should be something of a comfort. Think about it. You work for an employer because you think it’s a good deal for you: would you really want to stay if you thought it was a bad deal for him? If you thought all your hard work contributed nothing to the bottom line? A business relationship should be win-win — profit-profit — for both parties. Anything else is charity.

Losing your job is never fun, but it’s worth keeping in mind the big picture. We all benefit from living in an economy where there is a relentless push for efficiency — even more so if you happen to be out of work. Think of how much worse it would be to lose your job in a world where you couldn’t take advantage of Walmart’s low prices. 

And in a dynamic economy the more ability, skills, and work virtues you develop, the more companies can’t afford not to hire you. Besides, if no one appreciates your talents, you are always free to start your own business. 

The problem today is not that companies are laying off employees in pursuit of profits. It’s that the government has hamstrung everybody’s ability to pursue profits, leading to the sort of widespread, prolonged unemployment that wouldn’t exist in a genuinely free market. In an economy where the government gets out of the way and unleashes the profit motive, layoffs can be, dare we say, a good thing for everyone involved.

About The Authors

Yaron Brook

Chairman of the Board, Ayn Rand Institute

Don Watkins

Former Fellow (2006-2017), Ayn Rand Institute