Lay-offs add to the fear

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This was published 15 years ago

Lay-offs add to the fear

By Ross Gittins

Starbucks's decision to close almost three-quarters of its stores and lay off 700 workers may not distress too many coffee drinkers, but it's ominous news for the economy.

That's because it's just the latest in a lengthening list of lay-offs. Also announced last week was the Don smallgoods manufacturer's decision to close its factories in Melbourne and Western Australia and divest itself of 640 workers.

The closure of South Pacific Tyres' factory in Melbourne will cost almost 600 employees their jobs at the end of the year. Holden will stop producing four-cylinder engines at Fishermans Bend late next year, leaving 530 workers out of a job, though the company says it will absorb some of them into other operations.

Qantas has flagged its intention to slash between 500 and 1500 jobs. Its regional carrier, QantasLink, will close its maintenance base at Mildura and axe several air services at the cost of 20 jobs.

Insurance Australia Group plans to get rid of 600 staff. Suncorp is to close five bank branches in NSW and one in Bendigo. The NIB health fund is closing four retail centres, with job losses but no forced redundancies.

The point is not that those announcements add up to a significant blow to national employment in themselves, but that they're probably the forerunners of many such decisions.

Job losses and rising unemployment play a key role in compounding and lengthening downturns in the economy. In the jargon of Keynesianism, they're at the heart of the "negative multiplier effect".

And it's not just the direct effect of job losses on the spending levels of the unemployed. It's more the effect on the spending of the many people who, seeing those job losses, become fearful of losing their own jobs and tighten their belts in anticipation.

Many more people will fear losing their jobs than actually do. But whether the fears are justified or not, their reduced spending - with their saving used to reduce their debts - helps ensure more people actually do lose their jobs.

And here's the trick: it's not the monthly announcement of falling employment or rising unemployment figures that scares people. No, that's too impersonal.

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What does most to put the wind up people is a succession of stories on the nightly news of this firm laying off 700 workers and that firm declaring 600 staff redundant. Footage of workers streaming out the factory gates for the last time may be cliched, but it strikes a powerful emotional chord with the punters.

That's why I think that, when you start seeing a stream of such stories emerging, you know we're in for a rough ride.

Now, you may object that the big contraction in Starbucks's business has little to do with the downturn in the economy and a lot to do with simple management failure. An American business formula - and style of weak coffee - was applied out of context and didn't work.

This is no doubt true. And true of some of the other examples I listed. Trouble is, it's true in every recession. Tough decisions to scale-back or abandon business plans that didn't work ought by rights to be made just as soon as the lack of success becomes apparent. In reality, however, such decisions often aren't made until the onset of recession.

The rise in interest rates and fall-off in sales may be the straw that breaks the camel's back, but it's more likely managers hold back their admission of failure until a time when the blame can be shifted to the state of the economy. Don't blame me, blame the Reserve Bank.

Those of us who have lived through a few recessions know that, though it's a harsh thing to say, recessions put a cleansing fire through the capitalist system, burning up the dead wood and eliminating long-ignored pockets of wastefulness. The effects of structural change tend to be bunched around recessions.

Even as it has become clear the economy is entering, at best, several years of weak growth, I've been surprised to hear employers persisting with the notion that, because of the ageing of the population, we're in an era of chronic shortages of skilled labour.

So it's possible this downturn will be more like those in the 1950s and '60s where, good workers being hard to get hold of, firms engaged in a lot of "labour hoarding".

That is, rather than immediately laying off staff for whom there wasn't enough work, they carried them for the duration, reasoning it would be hard to reassemble such a good team when demand recovered. If such an attitude prevails this time, we could expect the downturn to be a lot shorter and shallower.

But it's hard to believe such enlightened thinking could triumph over what I call the New Ruthlessness, in which the managerial class feels possessed of a God-given right to dispense with the services of any mere mortal whose existence gets in the way of shareholders' profits (and managers' bonuses). If such short-sightedness continues to prevail, expect the downturn to be severe and prolonged.

Ross Gittins is the Herald's Economics Editor.

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