Financial euphoria, layoff contagion and collective bargaining

15.03.12 Editorial
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Workers have been given every possible reason to account for layoffs - but there's always room for one more. The next call for job cuts at your company may be wrapped in a message about job cuts and share prices at the competition.

On February 23, Procter & Gamble, the largest global producer of consumer goods by sales, announced the elimination of 5,700 jobs, 10 percent of its non-manufacturing workforce. Analysts welcomed this "exciting news" as a "great step forward". P&G claimed the cuts, together with additional cost-cutting measures, would boost profits by up to 9.5 percentage points. Cutting payroll would make the company more "agile", enthused the CEO. "Buy!" shrieked the analysts. Within 24 hours, the company's stock had risen 2.3%.

"P&G will be creating more flexibility that could impact peers, such as Unilever", an analyst told the UK Guardian, observing that the job-slashing "might hurt investor sentiment for Unilever". The "sentiment" was confirmed; investors, including employee pension funds, dumped their shares. Within 24 hours, Unilever shares had declined by 3%.

Unilever delivered excellent results in 2011, more than holding its own even in developed markets deemed to be 'saturated' (of course that didn't stop it from attacking pensions and implementing previously programmed job cuts). Among other reasons, it coped successfully with higher input costs by using its market position to raise prices and boost revenue, an undertaking in which P&G, which had to roll back some of their increases, was notably less successful.

Analysts were pleased with Unilever - until P&G stepped up the competitive pressure to cut jobs. This is because the two companies compete not only, or even primarily, in product markets; they are competing in financial markets, where analysts use simple (and simplistic) ratios to measure success. One measure of this competition is the ratio of employees to sales. Companies in similar branches are routinely benchmarked against one another to determine which delivers the highest margins with the fewest employees. (Internally, companies benchmark units using this metric to intensify competition within their own workforce).

According to the popular website Investopedia, "The sales-per-employee ratio provides a broad indication of how expensive a company is to run." This is of course nonsense: labour costs are only one - and not necessarily the most important - of the many factors in running a business. The point is lost on investors obsessed with quarterly, or even daily, movements in share prices. Within this simple metric, it makes no difference whatsoever whether the employee figures at Procter & Gamble, or any other manufacturing company, include non-manufacturing staff. What counts is headcount.

In a world where employees are merely "expenses", good news for investors of layoffs at P&G means bad news for Unilever workers, who immediately feel the heat. Share prices recover, and everything is forgotten anyway at the next investor call, but when the jobs are gone, they're gone.

Panicked adaptation to the quarterly report is always described as 'strategic' by management. Our response must be to broaden preparations for bargaining beyond the sales, costs and other figures which have traditionally shaped negotiations. Unions have to bring to light the purely financial forces motivating management decisions and demand a full explanation of the impact of competitors' job cuts on their own workplaces and the company's long-term plans.