How Recession Layoffs Hurt Trust and What to Do About It

How layoffs are perceived can make a huge difference in how employees respond.

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Signs of a slowing economy, such as a weaker labor market and sluggish growth, have heightened fears that businesses may soon face tougher financial conditions. In anticipation of a downturn, many companies are already considering cost-cutting measures—strategies that might safeguard their bottom lines in the short term but can have significant, long-lasting psychological effects on their workforce. By revisiting the aftermath of the 2008 financial crisis, when similar cost-cutting actions led to a range of negative outcomes, we can glean valuable lessons about navigating these challenging times more effectively.

The Fractured Psychological Contract: Trust in the Balance

In the face of economic downturns, organizations often resort to measures like wage freezes, layoffs, and cuts to training budgets to reduce costs. While these strategies might be financially prudent, they can deeply fracture the “psychological contract”—the unspoken expectations between employers and employees. According to a study published by the Journal of Business Research, which analyzed data from nearly 22,000 employees across more than 1,900 workplaces, these cost-cutting actions taken during the 2008 financial crisis significantly eroded trust in management and strained employee-management relations.

Chidiebere Ogbonnaya, a professor in human resource management at King’s College London and the author of the study, explained in an interview, “When employers make decisions that directly impact employees’ livelihoods, like wage cuts or layoffs, without adequate communication or involvement, it can feel like a betrayal. This breach of trust fundamentally undermines the psychological contract and can lead to a breakdown in the relationship between employees and management.”

Imagine an employee who has dedicated years of service to their company, only to see wages frozen or opportunities for advancement curtailed. Such actions can feel like a breach of trust—a betrayal of the implicit agreement that hard work and loyalty will be rewarded fairly. This perceived violation of the psychological contract can lead to a host of negative emotions, including resentment, frustration, and a profound sense of injustice. The study highlights that when employees perceive these breaches, their relationship with management deteriorates, morale declines, and workplace grievances increase.

The impact of these cost-cutting measures is particularly pronounced when employees are left out of the decision-making process. Feeling excluded from critical decisions that directly affect their lives can amplify feelings of distrust and alienation. Ogbonnaya said, “Involving employees in the decision-making process, especially in difficult times, can help maintain trust and mitigate feelings of betrayal. Transparency and inclusion create a sense of shared purpose, even when the news is bad.” Open communication and participatory decision-making create a sense of fairness and shared purpose, which can help preserve trust even in difficult times.

The Anxiety of Uncertainty: Job Security and Employee Well-Being

In uncertain economic climates, job security becomes a central concern for employees. The fear of losing one’s job or facing reduced wages can create a pervasive sense of anxiety and insecurity. A study published by Human Resource Management provides a nuanced understanding of how recessionary actions impact workplace absenteeism and overall employee well-being. Drawing from data on British workplaces, the study found that while recessionary actions like layoffs and wage cuts indeed increase anxiety among employees, they do not necessarily lead to a rise in stress-related absenteeism as might be expected. Instead, there was a notable increase in withdrawal-based absenteeism—where employees, feeling disengaged or demoralized, choose to be absent from work not due to illness but as a psychological retreat.

“Anxiety and job insecurity don’t always translate into physical absence from work,” said Ogbonnaya. “In many cases, employees stay at their jobs out of fear of losing them. This creates a phenomenon known as ‘presenteeism,’ where employees show up but are not fully engaged or productive.” This behavior likely stems from a fear of being perceived as noncommitted or, worse, being targeted in potential layoffs. Presenteeism, while seemingly positive from an attendance standpoint, can be detrimental in the long run. It often leads to decreased productivity, burnout, and a decline in overall workplace morale.

This dual impact of anxiety—driving both increased attendance out of fear and increased withdrawal due to disengagement—highlights the complex psychological terrain employees must navigate during economic downturns. Ogbonnaya said, “Employers need to be aware that the presence of employees at work does not necessarily mean they are mentally or emotionally engaged. There is a hidden cost to presenteeism that affects overall productivity and employee well-being.” It underscores the importance for employers to recognize these hidden costs and address them proactively to maintain a healthy, motivated workforce.

Fairness and Control: The Psychological Impact of Layoff Strategies

The manner in which layoffs are conducted can significantly influence how employees psychologically process these difficult events. The Human Resource Management study sheds light on the critical differences between voluntary and compulsory layoffs and their effects on employee trust and absenteeism. The research indicates that voluntary layoffs, where employees have some choice or control, tend to be perceived as more fair and less damaging to trust than compulsory layoffs, which often feel arbitrary and harsh.

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Ogbonnaya said, “How layoffs are perceived can make a huge difference in how employees respond. When layoffs are compulsory and perceived as unfair or poorly communicated, it can deepen mistrust and reduce morale significantly. On the other hand, voluntary layoffs, where employees have some agency, are often seen as a fairer process, which helps in maintaining a more positive organizational climate.”

This distinction is crucial because it underscores the role of perceived fairness and autonomy in managing employee reactions to cost-cutting. When employees believe they have some say in the process—whether it’s opting for voluntary redundancy or participating in a transparent dialogue about the company’s financial situation—they are less likely to feel betrayed by their employer. This sense of agency helps to preserve trust in management and maintain a positive organizational climate, even amidst financial turmoil. Conversely, compulsory layoffs that are perceived as unjust or opaque can deepen feelings of resentment and disconnection, leading to greater psychological withdrawal and a toxic workplace environment.

The findings suggest that management should carefully consider the psychological implications of their cost-cutting strategies. Ogbonnaya said, “Employers should prioritize clear communication, fairness, and support throughout the layoff process to mitigate the negative psychological impacts on their workforce.”

Building Organizational Resilience: Lessons for the Future

The psychological effects of cost-cutting measures are far-reaching, influencing not just individual well-being but also the broader organizational culture and performance. As we face the possibility of a new economic downturn, businesses must draw lessons from the past to better navigate the challenges ahead. The experiences from the 2008 financial crisis provide valuable insights into how organizations can balance financial prudence with the psychological health of their employees.

Leaders and managers should recognize that cost-cutting is not merely a financial decision but also a deeply human one. It involves people’s lives, livelihoods, and their psychological connection to their work and workplace. To minimize the adverse effects of these necessary actions, companies should prioritize open communication, involve employees in decision-making wherever possible, and ensure that any layoffs are conducted fairly and transparently.

Moreover, understanding the psychological dynamics at play can help organizations adopt strategies that not only reduce costs but also build a more resilient workforce. Ogbonnaya concluded, “It is crucial for companies to strike a balance between managing their financial challenges and supporting their employees’ psychological well-being. By doing so, they not only protect their business interests but also foster a more loyal, engaged, and productive workforce.”

As the economic landscape continues to evolve, organizations that can skillfully manage both their financial responsibilities and the psychological well-being of their employees will be better positioned to thrive. By fostering a culture of trust, fairness, and inclusion, companies can ensure that their employees remain committed and motivated, ready to face the challenges of an uncertain future with resilience and strength. In doing so, businesses not only protect their financial interests but also invest in the long-term health and loyalty of their most valuable asset—their people.