The down side of downsizing

NEW YORK - U.S. companies have cut more than 550,000 jobs this year as they try to preserve their profits in a slumping economy, but analysts say such downsizing must be done carefully for corporations to have any long-term benefits.

A host of companies have announced plans to cut payrolls since the economy began to weaken last year, and many chief executive officers are still taking a hard look at their overhead to determine who is expendable and who is not. That means layoffs will remain a possibility across a number of sectors, including financial services, airlines and manufacturing, for quite some time.

Analysts that track the labor market say they believe job cuts can in some cases position companies for solid growth once a recovery begins.

"If you're going to do it, do it right," said Michael Gibbs, a professor of economics and human resources at the University of Chicago. "You need to be cautious and go slowly because every slowdown ends, and in this case it's important because there's a really good chance by the end of the year, the economy is going to be looking fine again."

The job losses continued in August, according to the Labor Department, which said Friday that 84,000 were cut. The government also said the unemployment rate rose last month to 6.1 percent - the highest level in five years.

Cutting jobs is a quick way to cut costs - including salaries and benefits - but Gibbs pointed out that layoffs by themselves can be expensive because many companies pay for severance and outplacement services. They also can hurt morale and productivity if remaining employees feel the layoffs were handled badly; a company may have cut its payroll costs, but if it has unhappy workers, it may end up limiting its revenue growth as well.

Laying off skilled workers also can leave companies in a bind once the business climate gets back to normal. Having to hire and train new workers can put a business at a competitive disadvantage.

"They need to be cautious and not overreact," Gibbs said.

It is possible for companies to avoid layoffs by involving workers in planning alternative ways of cutting expenses, Gibbs said. He cited Lincoln Electric Co., of Cleveland, which designs and manufactures arc-welding products, as a company that worked with employees to avoid layoffs.

The company, which has about 7,000 workers globally, has a "no-layoffs" policy that has kept it from dismissing employees for economic reasons since the 1930s. During tough times, the company guarantees employment by shifting redundant workers to different jobs. For instance, a plant worker can be cross-trained and moved to an administrative job until the economy rebounds.

Even when layoffs cannot be avoided, analysts say, companies that bring employees into the process of cutting costs are likely to benefit. Staffers often have ideas about how the work can be done in a more efficient and less expensive way.

"They'll have marvelous success if people get involved in transforming their company to become lean," said R. Michael Donovan, a Framingham, Mass., business consultant who specializes in lean manufacturing. "They'll enjoy doing it, as long as they don't think they'll catch a bullet."

Analysts say they believe those companies are the kind that Wall Street is looking for when making stock picks.

Michael Feroli, the U.S. economist for JPMorgan Chase, said he believed it would be six more months before any kind of economic recovery was seen. At that point, he said, the slumping housing market will begin to show some signs of life and the global credit crisis finally will begin to resolve itself.

"As you move to a recession, not only are you trimming costs, but you are generally cutting the redundant workers," he said. "You end up with higher productivity in the labor force, and the downturn sows the seeds of its own upturn."