2 things every business must consider before laying off employees in a coronavirus recession

As the COVID-19 crisis escalates, the U.S. economy is falling into a recession. At-risk companies are ramping up their measures to cut costs, which includes determining if and when they should start laying off workers.

Taking the right approach depends, in large part, on two factors.

The first consideration: If layoffs are in the cards, management should consider the level of difficulty they’d face replacing these workers. The more skills and institutional knowledge employees have, the more of a challenge companies will face replacing them. 

Let’s not forget: Recruiting and retention challenges cause even more of a headache in a tight labor market, which the U.S. economy was experiencing until just a few weeks ago. So if a more optimistic recession scenario plays out—a short contraction followed by a strong recovery—the slack will fade. A tight labor market will resume—and with it, the war for talent.

Second, management needs to consider the severity and duration of the drop in business. The harsher and longer the drop, the more reason businesses have for initiating layoffs. How long this recession will last is an open question, but it’s undoubtable that the coronavirus pandemic has put millions of jobs in jeopardy; the unemployment rate could reach double digits by May. 

As companies weigh which actions to take, it helps to look at the affected industries through three categories: those severely impacted, those somewhat impacted, and those that actually stand to gain some ground.

Severely impacted: industries highly allergic to social distancing

The travel, hospitality, and entertainment industries could go into survival mode. Given the factors working against these industries, the severity of the drop in their business is likely to be the most drastic, and the duration of the drop is likely to be the longest.

Their Achilles heel is social distancing, which public officials and experts say could last anywhere from a few months to more than a year. Further compounding the risk of layoffs: Many of these jobs—but by no means all of them—don’t require scarce skills or in-depth institutional knowledge. Replacing workers could undoubtedly take time, but doing so wouldn’t be daunting. Many of the companies in these industries will need to take draconian steps to survive.

Somewhat impacted: the usual recession victims

Recessions almost always take a toll on manufacturing, freight transportation, and advertising companies. But because social distancing isn’t their kryptonite, they can expect a drop in business volume that’s much less severe than it would be for businesses whose work requires substantial in-person interaction.

For this cohort especially, management should think twice before giving pink slips. After all, many employees in these sectors—including manufacturing and transportation workers—have been hard to find. In February, unemployment for these two groups stood at 3.9% and 3.4%, respectively. Laying off workers may prolong the path to recovery, since employers will have to rebuild their workforces and thus reincur recruiting and training costs.

Rather than outright layoffs, the better solution in most cases could be to reduce employees’ hours. For example, in government-funded work sharing programs, employers cut the hours worked for employees. To compensate for the reduction, workers receive unemployment benefits in proportion to the hours lost. More than half of states already have formal shared-work programs in place.  

Positively impacted: industries that may benefit

Perversely, some companies will actually see higher demand in this recession and will need to augment their workforces. Food retail, some health care companies, and discount brands may need to hire to meet growing need for their services.

Management in these sectors should look for workers suddenly jobless because they were employed in severely impacted industries. Laid off hotel and restaurant workers, for example, would come at a low price and could swiftly transition into food retail. Such switches would not work for all jobs, of course, but they would be a start.

Companies that operate in hard-hit areas where layoffs are more extensive figure to benefit more, as there will be larger numbers of available workers. Las Vegas and many areas in Florida rely on the hotel and entertainment industries, for example, and are likely to have many new job seekers soon. 

As the pandemic continues with no clear end in sight, the risk is a cycle of self-fulfilling expectations. The more employers expect the crisis to be severe and long, the more they are likely to lay off workers and cut spending. That, in turn, would lower business and consumer confidence and worsen the crisis. 

Hopefully, the coming recession will be shorter and less severe than many expect, and many employers will attempt to keep as many workers as possible.

Gad Levanon is a vice president at the Conference Board, where he heads the Labor Markets Institute.

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