There is no doubt that a skills shortage exists in Australia. Just looking at the government’s recent programs to bring in more skilled migrant workers gives you a clear picture. But despite this stubborn talent shortage, the country has also experienced a sharp rise in unemployment in January 2024.

The Australian Bureau of Statistics (ABS) reported that the unemployment rate rose to 4.1% in the opening month, the first time in two years that it surpassed 4%.  It means at least 22,000 Australian professionals joined the unemployed populace.

The apparent paradox of having a high unemployment rate and a nagging skills shortage can only mean one thing: many companies have either paused hiring or laid off workers to cut costs. And this is likely because businesses are still waiting for the Reserve Bank to cut interest rates.

High interest rates often act as a brake on the economy, and Commonwealth Bank CEO Matt Comyn told the Australian Financial Review that interest rate cuts, and even tax cuts, may be delayed until 2025 because of rising inflation. The uncertainty has already pushed some organisations to swing the axe on some roles.

Sydney Morning Herald has reported an increase in white-collar job losses, particularly in finance, professional services, and technology. The report cited data from the Finance Sector Union that tallied an estimated 3,000 jobs were cut in 2023 with Westpac and Commonwealth Bank topping the list.

With economic uncertainty expected to continue in 2023, many companies are asking the same burning question, “Should layoffs be part of my strategy in a tightening economy, or is this a short-term solution that can do more harm than good?”

The issue is rarely black and white, but we’ve dissected the the potential benefits and drawbacks of layoffs to help you out with your decision.

READ MORE | 2023 Layoffs: A timeline of job-cuts in top companies

When layoffs appear inevitable

Let's first acknowledge the circumstances where layoffs may seem like the only option. If a business faces dwindling profitability, rising costs, and a shrinking market, cutting headcount might appear the quickest route to regaining financial stability.

This is particularly true when other cost-saving measures have already been exhausted. Additionally, some layoffs stem from technological disruption. If industries rapidly automate and digitalize, certain job roles might become redundant over time.

In these instances, businesses might perceive layoffs as a grim but essential survival tactic to remain afloat and ultimately safeguard a larger portion of their workforce.

The real consequences of job loss

Before hailing layoffs as a magic bullet or condemning them outright, it's crucial to understand the ripple effects that extend well beyond those directly affected. 

One thing that you cannot downplay is the individual hardships involved. Loss of income translates to real anxiety about bills, mortgages, and putting food on the table.

Furthermore, finding new employment in a less favorable job market can be a demoralising and prolonged struggle.  This stress has a knock-on effect on mental and physical wellbeing.

Economically, a wave of layoffs can trigger a downward spiral. With less disposable income, laid-off workers curtail their spending, impacting everything from retailers to service providers.

The resulting dip in demand further stresses businesses, potentially leading to even more layoffs contributing to a sharp rise in unemployment.

Moreover, it is important to recognise that businesses don't exist in a vacuum. A community suffering layoffs might eventually witness dwindling tax revenues, which hinders the provision of  vital public services, creating a broader cycle of decline.

READ MORE | The impact of mismanagement on layoff decisions

The cost of lost expertise

From an organisational perspective, layoffs should not be considered a cheap or straightforward solution. When done in haste or without careful consideration, businesses risk losing critical talent and institutional knowledge.

Rebuilding this lost expertise is costly. When the need arises, highly skilled or experienced workers who took years to master the system of your company will not be easy to replace.

Moreover, as workloads get redistributed amongst the remaining staff, a sense of insecurity and overwork can take root, impacting morale and productivity. This erosion of human capital ultimately weakens the organisation.

Damage to employer brand

During economic downturns, businesses that prioritize short-term cost savings over long-term resilience might suffer in terms of public image.

The talent market's memory is long. When economic conditions improve, top candidates looking for stability and loyalty may gravitate toward companies that supported their workforce during harder times.

This puts organizations known for hasty layoffs at a competitive disadvantage. Proof of this is a study by job platform SEEK that showed at least 85% of job seekers are more likely to apply for a role with a strong employer brand.

Employees, potential hires, and the wider public look beyond an organization’s financials to its ethics and values. In the context of layoffs, an organization's decision can impact its reputation for years to come.

READ MORE | Nurturing a powerful employer brand

Alternatives worth exploring

Layoffs often represent a failure of imagination rather than true inevitability. Before resorting to them, businesses would be wise to consider several alternatives: 

1. Pay reductions and shared sacrifice

If the crunch is temporary, employees might be receptive to reduced wages or hours in exchange for job security. In some ogranisations, managers and executives take the pay cut the first before the rest of the workforce to express their solidarity. 

2. Retraining and upskilling

Upskilling the existing workforce allows businesses to pivot when faced with changing job requirements. Investing in developing existing staff is often more sustainable than mass dismissals followed by new hires. 

3. Government stimulus and support

When layoffs stem from a broad economic downturn, government programs for businesses and workers can significantly soften the blow, protecting not just individuals but also the long-term health of the economy. 

Layoffs: A necessity or just folly?

The uncomfortable truth is that there's no one-size-fits-all answer when it comes to evaluating layoffs.  Sometimes they may genuinely be the lesser of two evils.

Nevertheless, they should always be considered a last resort and not the default. It's vital to remember that layoffs represent a high-stakes gamble for all involved. Businesses trade immediate cost savings for the potential loss of skilled workers, damage to morale, and reputational risks that can linger even after economic recovery.

At the moment, at least 38% of companies in Australia are anticipating layoffs this year, according to a study by job seeker assistant app Resume Builder. Some of them are cutting jobs because of AI, but most of them are because of a possible recession.

Will you join the layoffs bandwagon? Remember, choosing the right strategy in tough times will safeguard jobs, strengthen the economy, and foster a fairer, more resilient Australia for everyone.