The Psychological Effects of Downsizing on Employee

The term ‘downsizing’ refers to the reduction of the workforce through either voluntary or involuntary means or a combination of both. Before the early 1980s, organizations were forced to reduce their workforce whenever they experienced stress and not much thought was given to it. In recent years, however, there has been an increasing interest in this specific area of research (Luthans, 2005).

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A number of researchers from the fields of psychology and sociology have investigated the impact of involuntary job loss due to organizational restructuring on exiting employees. The general finding is that when productive employees, through no fault of their own, lose their jobs, they, along with their families, experience a very high degree of stress on the psychological level. The loss of income, loss of employment, and ensuing employment caused by downsizing are linked with psychological distress, loss of self-esteem, increased tension within families, and a sense of powerlessness and resignation (Gallie and Marsh, 1993).

The psychological consequences of downsizing affect both survivors and victims of downsizing such that it’s possible to argue that all employees whether or not they retain their jobs are ‘victims’ (Dunphy, 2000). This, in turn, negatively affects society as a whole by contributing to the rise of societal problems such as increased drug abuse and crime (Tourish and Hargie, 2004). Hence, there is now more concern given to both those who are let go and those who survive. Theoretical models are being created and basic research is being done on coping with job loss.

Downsizing has become so widespread in recent years that employees are no longer surprised by it. In fact, they almost accept it as inevitable. Despite this knowledge, they are strongly affected when they personally experience it, and most organizations offer settlement packages in an attempt to reduce the negative impact (Labib & Appelbaum, 1993).

Studies have shown, that the stress experienced by terminated employees depends on a large number of factors such as age, gender, financial position, social support, length of employment, level of education, previous occupational level, degree of satisfaction with the terminated job, career status, individual stress-coping ability, method of termination as evidenced by lead times given, and channels used (Leana and Ivancevich, 1987) and Leana and Feldman (1988) Of these, Leana et al. (1987) found that the method of termination has the longest-lasting effects on a psychological level.

In discussing terminations resulting from acquisitions, Schwieger et al. (1987, p. 127) indicated that a loss of attachment, lack of information, and perception of “apparent managerial capriciousness” as the basis for decisions on who will be terminated causes anxiety and an obsessive need for survival, which often leads employees to leave the company with bitterness and hostility.

However, Schweiger et al. (1987, p. 130) indicated that, ultimately, “it was apparently not the terminations per se that created this bitterness but the manner in which the terminations were handled. Those who remained… expressed feelings of disgust and anger that their friends and colleagues were fired… (and) felt guilty that they were not the ones who were let go because they believed their coworkers performed at least as well or better than they did” (Schweiger et al, 1987).

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In reviewing the literature on the effects of job loss, Leana and Ivancevich (1987, p. 302) stated that “diminished psychological well-being” usually results from involuntary job loss. Based on their review of the earlier literature, they define this term as ranging from increases in hostility, depression, and anxiety, to decreases in self-esteem. In addition, Leana and Feldman (1988) also reported that unless terminated employees find re-employment immediately after a job loss, they suffer for an extended period from depression, apathy, and emotional instability which lead to a deterioration in family relationships and work-related attitudes.

A study of Canadian hospitals found that those that had downsized were significantly more likely to report lower employee satisfaction and greater internal conflict (Wagar and Rondeau, 2000). In their general examination of organizational downsizing, Appelbaum, Simpson, and Shapiro (1987, p. 69) stated that:

“The widespread practice of downsizing has had major repercussions… Many cases of individual depression and hardship, both economic and psychological, have been reported. Employees lose confidence when they lose their old jobs and are unable to get new ones.”

This is very true in the current climate of accelerated technological development. Terminated employees find they are no longer as marketable as the last time they had to search for a job and that they need a certain amount of retraining to acquire new jobs. In their Model for Job Loss, Leana and Feldman (1988) hold that job loss can cause psychological changes, cognitive appraisals, and emotional arousals. However, the intensity of these reactions depends on the nature of the job and the career status of the employee.

The coping strategies used by the employee depending upon the intensity of the reactions along with personality moderators, such as type-A behavior, locus of control, and level of self-esteem, and by situational moderators such as labor and economic conditions, and the quality and type of social support available. The nature of the coping strategy adopted by the individual, along with his race and gender determines how easily the person gets a new job (Labib & Appelbaum, 1993). Depending on how a person gets readjusted in a new job, he or she may develop positive or negative job attitudes, improvement or decline in health, and family and social relations (Labib & Appelbaum, 1993).

Chris Argyris in his book titled “Integrating the Individual and the Organization” in 1990 conceptualized organizational careers as exchange relationships in which individuals traded loyalty and hard work for long-term job security, advancement, and opportunities to grow and develop (Leana & Rousseau, 2000).

This is further emphasized by the findings of Levine. Levine (1992), based on studies of employee morale after downsizing, reported that survivors feel that a contract has been broken between them and the organization. Levine also found that how terminated employees were treated had a significant impact on surviving employees’ morale and work habits. Koonce (1991) reports that, in a study of 30 Fortune 500 companies that had experienced downsizing, it was found that poor employee morale was mainly due to lack of communication and information.

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One stream of research is that procedural justice plays a huge role in those affected by downsizing. Procedural justice is concerned with the fairness of the procedure used to make a decision. This means, in the context of downsizing, there should be equality. All males and females and all races should be equally considered in downsizing. In three studies involving those already laid off, survivors of a firm that had downsized, and those scheduled to be laid off, it was found that procedural justice had a positive impact.

According to these three studies, the negative effects of layoffs can be blunted by the way downsizing is handled. Employees were more hostile when they thought procedures leading to the layoffs were not handled fairly with sufficient notice and fair treatment of employees during downsizing. When procedures were seen as fair, employees still supported and trusted their firms even after the layoffs had occurred.

Similarly, Kates, Greiff, and Hagen (1990) stated that unemployment or long-term job loss affects the physical and mental health of terminated employees negatively. They also found that loss of self-esteem was a major psychological effect in workers who lost their jobs (Kates et al., 1990, p. 51). This is evident by the following factors: a sense of failure, shame, feelings of rejection, loss of control over an individual’s environment, loss of work-related roles, the reaction of family and friends, and the attitudes in the community. These lead to depression which is also experienced by the spouse, and often, this leads to violence from which the whole family suffers, and may end in family breakdown. Kates et al. (1990) also cite reports linking job loss to increased suicide rates and to drug and alcohol abuse.

Jukes and Rosenberg (1991), of Murray Axmith and Associates, researched the effects of a husband’s job loss on wives and reported that a wife suffers from a “societal error of omission” (1991, p. 3) by being ignored as a victim of the job loss experience. They contend that a wife progressively experiences shock, anger, shame and embarrassment, anxiety and fear, depression, stress, betrayal, and, finally, guilt at feeling all of these.

These are only some of the effects that wives actually experience along with their husbands and family after a husband’s job loss. These findings may be generalized and applied to either spouse. When one of the spouses loses a job, the other is generally ignored as a victim, regardless of their gender. Though they may not be directly affected in the same manner as the ones who lost the job, they do share the psychological negative effects of job loss experienced by one of them.

Leana and Ivancevich’s (1987) have found that downsizing leads to “increased marital friction and stress”, “unwelcome reversals in traditional husband-wife roles”, “decreased family cohesion and increased conflict”, “significant increases in suicide rates among job losers”, and “a decline in children’s perceptions of their fathers’ status and parental authority”. They also report that unemployment has been identified as the most common immediate cause of child abuse.

Research strongly suggests that survivors in the organization also suffer adverse effects after downsizing has occurred. One potential problem following downsizing is that of survivor guilt. Following any major trauma, those who survive are often left with a myriad of mixed feelings (Tourish & Hargie, 2004).

Isabella (1989) listed key concerns that deal with career questions after a downsizing. She indicated that survivors are usually not informed or are misinformed about many issues, such as their place in the newly structured organization, expected performance standards, the key people in existing networks either leaving or changing, extra work demands, the value of their expertise to the new organization, and the existence or lack of opportunities for advancement. These are further compounded by financial and job insecurities. One survivor from a downsized firm describes this modern-day malady: Just when we begin to think our jobs are safe, they change the rules on us.

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We don’t know who’s in charge, which we can trust, or what we’re supposed to be doing. The more unsettling it gets around here, the less productive we are.” In examining the reactions of survivors of layoffs, Greenberg (1990) found that survivors are in a good position to judge the fairness of layoffs both distributively and procedurally. Surviving employees were found to be more committed to the organization when they perceived that the terminated employees were adequately compensated and equitably treated.

Burke and Cooper (2000) listed the following psychological symptoms in the survivors of downsizing: denial, job insecurity, feelings of unfairness, depression, stress and fatigue, anger, reduced risk-taking and motivation, sense of betrayal, anger at the layoff, sense of permanent change, lots of blaming others, thirst for information (Tourish & Hargie, 2004).

According to Kates, Greiff, and Hagen (1990), the predisposing factors in the individual that influence the effects of job loss are character strengths and deficits, the meaning of the job, and previous experience and personality style. New problems that individuals face after job loss also have an impact on the long-term effects of job loss. These are related to new stresses, losses, role changes, time utilization after termination, finances, and job search skills.

Furthermore, Kates et al. (1990) categorize the support systems affecting the terminated employee’s response to job loss into environmental sub-systems relating to the individual, the family, the social system (as in agencies), the community, and the workplace. Empirical research suggests that the amount and type of post-termination corporate assistance can have a mitigating effect on employee stress levels. Leana and Feldman (1988) specifically identified advance notification, severance pay and extended benefits, retraining programs, and outplacement assistance as critical to reducing stress levels.

It can be concluded, therefore, that there is overwhelming evidence in research that employees who lose their jobs through no fault of their own and who do not find re-employment immediately after a job loss, will suffer at the psychological level.


Appelbaum, Steven H., Simpson, Roger, and Shapiro, Barbara T., “The Tough Test of Downsizing”, Organizational Dynamics, Vol. 16, No. 2, (1987), pp. 68-79.

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Burke, R. and Cooper, C. (2000). The new organizational reality: Transition and renewal. Blackwell Publishers. Oxford.

Dunphy, Colboyd Dexter (2000). Sustainability: The Corporate Challenge of the 21st Century. Allen and Unwin.

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Isabella, Lynn A., “Downsizing: Survivors’ Assessments”, Business Horizons, (1989), pp. 35-41.

Jukes, Jill and Rosenberg, Ruthan, I’ve Been Fired, Too! Coping with Your Husband’s Job Loss, (Toronto, Ontario, Canada: Stoddard Publishing Co. Ltd., 1991).

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Leana, R. Carrie and Rousseau, M. Denise (2000). Organizational Effectiveness. Oxford University Press. New York.

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