Once a month, researchers from CBS write a column in Børsen, where they give readers a current and research-based perspective on the challenges that leaders face.
This month, Birthe Larsen, Associate Professor at the CBS Department of Economics and Business Economics, has helped investigate whether companies cut wages or lay off employees when the economic crisis hits. Many companies indeed see crises as an opportune time to lay off or reorganise, but what are the considerations at play?
Economic crises often lead to high levels of redundancies and rising unemployment. We saw this most recently during the corona crisis. Layoffs are costly for both employees and companies.
It is costly for dismissed employees, as they are placed in an uncertain and financially challenging situation. And it is costly for companies, because when the economy turns around and things pick up, they have to rehire. This process is resource-intensive for two reasons. Firstly, because it takes time to find the right employee and secondly, because it takes time to train a new hire.
So why don't companies cut wages to a greater extent to avoid layoffs? And what are their general considerations when making layoff decisions during an economic crisis?
That's what I have been investigating in a research project with researchers at the University of Copenhagen, Bergen School of Economics and the San Francisco Fed.
How do you adapt?
In the summer of 2021, we asked all Danish companies about their layoff and wage policies in the first pandemic year of 2020. We were interested in how they adapted their workforce during the corona crisis in 2020, whether it was through an adjustment to the number of employees or a salary reduction.
We also asked them about the reasons for the adaptation strategy they chose to follow. We used quantitative, open-ended, hypothetical and qualitative questions to understand how and why employers undertook the adjustment process. We then linked our survey to register data for all companies and employees to gain insight into which companies did what. The final dataset has responses from 2400 companies and is a representative sample of the population of Danish companies.