Imagine two business partners, Sue and Steve, form a company. The company finds success and is acquired by a larger competitor. After the sale has been consummated but before the payment has arrived, Sue seeks to dissolve the partnership, asserting that Steve does not deserve any of the proceeds from the sale. While the fair split of the proceeds might not be 50/50—perhaps Sue brought key assets to the venture or wrote the code that undergirds the company’s intellectual property—the notion that Steve deserves nothing seems patently unfair. After all, Steve was there at the formation of the company and made positive contributions to the company’s revenues and ultimately sale.
Now swap “Steve” with “employees” in the same hypothetical. Rather than share in any of the proceeds from the sale, Sue’s company fires its employees, depriving them of the chance to partake in any of the upside from the sale. Although the relationship between the partners is not materially different in the two examples, we seem programmed as a society to accept the horrible fate of zero upside for workers. And that’s wrong.
Before the success (or failure) of a firm is realized, the steady stream of paychecks to the workers is a risk born uniquely by the employer; the worker will continue to collect such payments so long as their employer is profitable or at least heading in that direction. But when profitability is no longer achievable, that bargain falls apart. In the employer-employee relationship, workers bear downside risk that their employer underperforms. Hence, when a company experiences failure, it is reasonable for that company to downsize its workforce to keep the doors open.
By contrast, when a company experiences success, downsizing its force appears counterproductive and tantamount to the misappropriation of the workers’ contributions. And, it bears a striking similarity to Sue’s patently unfair offer in the hypothetical above. Precisely quantifying workers’ value added (as opposed to owners) is no easy feat, but we can safely infer it is not zero. If workers understood that they also bore risk in the good state of the world—that is, when their employer was overperforming—then they likely would not have signed up for the original bargain. For example, they would have demanded additional compensation in the form of equity. This is basic economics: higher risk requires higher returns.
Since the start of the new year, the New York Times business section (which I follow quasi-religiously) has chronicled several episodes in which a successful firm has made massive layoffs of its workforce. To wit:
- On February 17, Southwest Airlines announced mass layoffs, amounting to 15 percent of its workforce. The Times notes that Southwest has “reported profits each year since [the pandemic in 2020] and remains the only one of the four largest U.S. airlines to have never filed for bankruptcy protection…” William McGee of AELP suspects that Elliot Investment Management’s takeover of Southwest’s boardroom might be to blame.
- On February 13, JP Morgan Chase and Blue Origin axed hundreds of workers after record profits and a successful rocket launch, respectively. DealBook, a division of the Times, notes that the firings by Chase “come after the lender enjoyed record profit and a soaring stock price over the past year.”
- On February 11, Chevron announced its intention to lay off up to 20 percent of its workforce, amounting to 9,000 displaced workers. The Times reports that the firings follow “a few years of robust profits after oil prices surged when Russia invaded of [sic] Ukraine in early 2022 …”
- On January 22, Amazon announced layoffs of 1,700 workers in Quebec, after unions gained a foothold in one of the company’s warehouses in the province. Per Statista, Amazon earned $12.5 billion in net sales in Canada in 2023.
- On January 14, Meta announced plans to cut five percent of its workforce, or about 3,600 jobs. Dealbook reported that “Meta has committed to spending up to $65 billion this year to keep up in the artificial intelligence race, raising a need to offset that investment.” At the time of the announcement, Meta was worth $1.8 trillion, and its stock was up 53 percent over the last year.
And so it goes. In this late-stage of capitalism, workers bear the risk when employers underperform and when employers overperform. If such opportunistic behavior by employers bothers the Times, it is not showing its feelings. By amplifying this news, however, the Times is unwittingly communicating these sacrifices to the firms’ investor overlords, who typically reward companies for slashing labor costs with higher stock prices.
Not only is firing workers during a boom unfair to workers, it is also a breach of the social compact. Workers should share in the upside when employers are profitable; instead, they are cut loose. This is no novel proposition after all. Look at the NBA’s collective bargaining agreement—the players share equally in the revenue increases and bear equal risk of the shortfall. Not so in much of the rest of corporate America, where the exploitative impulse allows employers to privatize the benefits of their innovations in the event of success, but socialize the dislocation costs regardless of the outcome, success or failure. Many displaced employees will likely collect unemployment insurance, paid for by taxpayers.
Heads employers win, tails employers win. This is not a fair bargain. And as a society, we should demand a different set of rules on behalf of our workers.