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Calculating the High Cost of a Layoff – to an Employer

October 5th, 2011


We all know that layoffs are terribly costly, both financially and spiritually, to workers who lose their jobs, their families and their communities.

But how much do layoffs cost the companies who let workers go and then, when the economy improves, hire replacements? (Sad but true, things are so bad now that many firms aren’t rehiring.)

Most employers simply can’t answer that question with anything near the precision they bring to other important decisions. “They just don’t have a systemic way to assess what is the net present value of the decision whether or not to lay people off,” Peter Cappelli from the Wharton School at the University of Pennsylvania told me a couple of years ago. Too often, layoffs are an act of desperation, not rigorous analysis.

Here’s help — an interesting new web-based calculator which allows an employer to plug in a few readily-available numbers and estimate what it can cost to lay off a worker and then replace her down the road.

The Employee Turnover Calculator is an easy-to-use online tool from the Center for Economic and Policy Research (CEPR) and the Center for Law and Social Policy (CLASP) in Washington.

Using some reasonable numbers — you can plug in different figures of your own — the calculator suggests that letting go and then replacing someone who makes $25,000 a year can cost a company $2,746 once the expenses of recruiting, hiring and training a new employee are factored in.

Admittedly, that’s an absolute minimum; a very conservative estimate.

The $2,746 does not include the cost of any severance pay, processing termination paperwork or shifting someone else into the now-vacant position until a new employee is hired.

And it does not include the cost to an employer of a smart worker being shown the door, who then takes her valuable hard-earned intellectual capital with her to a competitor down the street or across the country.

Factor those elements in and the cost of that layoff will be significantly higher.

Here’s something else employers should think about: the emotional trauma of layoffs on those who survive a cut is often so painful that more workers decide to leave voluntarily before the axe falls on them.

Research suggests that in some workplaces, for every worker formally laid off, up to five more quit within the next year.

That means a layoff can actually leave your company understaffed, forcing you to quickly start hiring — and the cost of that could easily wipe out any expected savings from the initial decision to let workers go.

For too many CEOs, pulling the layoff lever seems so straightforward, but as this new calculator helps make clear, too often, it’s exactly the wrong thing to do.

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