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Lay-offs or pay cuts?

See OP: Which do you choose?


  • Total voters
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Goobieman

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Let's say that you work in a department within a company. Your department has 100 employees, all of whom make about the same wage.

Management informs your department that it needs to cut your overall payroll by 10%, and offers you, collectively, the choice:

-10% pay reduction for everyone
-10% of your department will be laid off.

The chance of you being laid off is the same as everyone else's

Which do you choose?
Please explain your answer
 
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Paycuts are typically the better option in a recession. Laying people off means you lose their productivity, which can easily cancel out the money saved getting rid of them, especially in the long term. Furthermore, because of wide spread economic downturns, you aren't likely to lose employees to other companies even with reduced pay.
 
Paycuts of course. In this economy, the 10% who are cut are unlikely to find other jobs and this just puts an additional drain on the economy that's already stretched to the breaking point. Further, you have the cut in productivity and, when the economy gets better, a much longer training time to hire new workers to come back up to speed.
 
Let's say that you work in a department within a company. Your department has 100 employees, all of whom make about the same wage.

Management informs your department that it needs to cut your overall payroll by 10%, and offers you, collectively, the choice:

-10% pay reduction for everyone
-10% of your department will be laid off.

The chance of you being laid off is the same as everyone else's

Which do you choose?
Please explain your answer

Personally I would take the paycut.On the other hand I can see a workers not wanting to take a pay cut because there is no guarantee that when the company is doing well that they are going to reinstate everyone's regular pay,they could just pocket that 10% or use that 10% to hire more workers and then in another crises ask for another 10% pay cut from workers and do the same thing over again.
 
On the other hand I can see a workers not wanting to take a pay cut because there is no guarantee that when the company is doing well that they are going to reinstate everyone's regular pay,they could just pocket that 10% or use that 10% to hire more workers and then in another crises ask for another 10% pay cut from workers and do the same thing over again.

If the company doesn't raise wages when the economy picks back up again, they risk getting their employees poached by their competitors who do. Provided you have a competitive market run by real management, the system works pretty well. The biggest problem is when they lay everyone off to boost their stock price enough to make fortune, then simply leave and cash out before the lack of productivity kills the company.
 
Assuming I'm in the same financial position I am right now, I can live with a 10% reduction in pay without worrying about paying my bills because I have a more than 10% surplus at the moment.

I would not be able to handle a 100% reduction in pay, so the 1 in 10 shot that I would lose my job isn't worth the risks involved to try and maintain that 10% of my income.

Even if I had less than a 10% surplus of income, I could more than likely pick up a second job fairly easily that would make up the difference at my current pay scale, so again, it's not worth the risk.


But let's say I wasn't in my current situation. Let's say I already had a second job and I was in danger of losing my home and struggling to put food on the table.

In that scenario, there is a 100% chance that I would be screwed if I took a 10% reduction in pay. This is identical to the chance that I'd be screwed if I lost my job: 100%.

But I would only have a 10% chance at losing my job.

In that instance, it just becomes a matter of probabilities:

Taking pay cut = 100% chance of not making ends meet

Going for layoffs = 10% chance of not making ends meet.

In that case, the smart money would actually be on risking the layoff since your odds of coming through it OK are far greater than they are if you take a reduction.
 
It would depend on if the layoff were based on productivity or seniority....
The only way I would go with a pay cut is if it were a seniority issue & I was at the bottom of the totem pole......;)
That said, even if you get to keep your job in that scenario, you would be taking an equivalent of a paycut through an increased workload....;)
So, the reality is you are screwed either way, just how screwed remains to be determined.....:lol:
 
It would depend on if the layoff were based on productivity or seniority....
The only way I would go with a pay cut is if it were a seniority issue & I was at the bottom of the totem pole.
The question stipulated that everyone had the same chance of being laid off.
 
On a macroeconomic level, pay cuts are by far the superior choice. It's much better to have more people working fewer hours. Even if it's hard, people who are making 90% of what they were previously making will generally be able to get by.

On a personal level...if my chances of getting laid off were the same as everyone else's, I think I'd prefer to roll the dice and vote for the layoffs. I'm confident that I can find employment fairly easily, regardless of how bad the economy is.
 
Really a silly question.
 
On a personal level...if my chances of getting laid off were the same as everyone else's, I think I'd prefer to roll the dice and vote for the layoffs. I'm confident that I can find employment fairly easily, regardless of how bad the economy is.

If that's the case, the smart thing to do would be take the pay cut and find employment elsewhere ASAP.

Again, it's simple math. Let's say you take home $1000 a week. You take a pay cut of 10% and you are down to $900 a week. If you lose your job though, you to $0 per week. Since you are in DC, if you go on unemployment you are only down to $359 per week.

Let's say with the extra free time, you are able to get a job in 2-4 weeks being unemployed. You've lost somewhere between $2000 and $4000 if you don't take unemployment and between $1282 and $2564 if you do take unemployment.

If you look for a new job while you are working at 90% of your old salary, and it takes you 4-8 weeks to find a job, you've lost only $400-$800.

Risking the layoff and then looking for a job doesn't make any mathematical sense because you can still look for the job while accepting the pay cut. Even if it take 12-25 weeks to find the new job while taking the pay cut, you still come out with less loss than you would if you were on unemployment for only 2-4 weeks.

Now, if you go 12-25 weeks on unemployment you will lose between $7,659 and $16,025.

That's compared to $1,200-$2,500 by taking the pay cut.

There's absolutely no benefit to rolling the dice if you think you can replace the job easily. The fact that you can replace the job easily is true whether you take the pay cut or not, so there is no tactical benefit to rolling the dice.

It would actually be stupid to do it in that situation because the only reason to put up that kind of risk is if you can achieve some sort of massive benefit.
 
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If that's the case, the smart thing to do would be take the pay cut and find employment elsewhere ASAP.

Again, it's simple math. Let's say you take home $1000 a week. You take a pay cut of 10% and you are down to $900 a week. If you lose your job though, you to $0 per week. Since you are in DC, if you go on unemployment you are only down to $359 per week.

Let's say with the extra free time, you are able to get a job in 2-4 weeks being unemployed. You've lost somewhere between $2000 and $4000 if you don't take unemployment and between $1282 and $2564 if you do take unemployment.

If you look for a new job while you are working at 90% of your old salary, and it takes you 4-8 weeks to find a job, you've lost only $400-$800.

Risking the layoff and then looking for a job doesn't make any mathematical sense because you can still look for the job while accepting the pay cut. Even if it take 12-25 weeks to find the new job while taking the pay cut, you still come out with less loss than you would if you were on unemployment for only 2-4 weeks.

Now, if you go 12-25 weeks on unemployment you will lose between $7,659 and $16,025.

That's compared to $1,200-$2,500 by taking the pay cut.

There's absolutely no benefit to rolling the dice if you think you can replace the job easily. The fact that you can replace the job easily is true whether you take the pay cut or not, so there is no tactical benefit to rolling the dice.

It would actually be stupid to do it in that situation because the only reason to put up that kind of risk is if you can achieve some sort of massive benefit.

This assumes that if my firm offers to pay me 90% of my previous wage and I seek out a similar job, that the new job will pay me 100% of my previous wage. That seems implausible, as the pay cut will have probably stemmed from systemic economic difficulties which will affect similar firms as well.

Besides, the way the question is phrased, I'm not voting to either take a pay cut or be laid off. I'm voting to either take a pay cut or risk a 10% chance of being laid off. So assuming your numbers are correct, my expected loss if I vote to risk the layoff is only between $128 and $256.
 
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This assumes that if my firm offers to pay me 90% of my previous wage and I seek out a similar job, that the new job will pay me 100% of my previous wage. That seems implausible, as the pay cut will have probably stemmed from systemic economic difficulties which will affect all other firms as well.

Since you said "I'm confident that I can find employment fairly easily, regardless of how bad the economy is." the assumption must be that there aren't systemic economic difficulties affecting other firms as well, otherwise your confidence is entirely misplaced.

Also, if you retain the job at the paycut, you have the luxury of looking for another job and holding out until you get one that pays the old scale or higher.

There's probably more than a 10% chance of pulling that off unless you currently work for one of the firms that have payscales in the top 10%.

If your firm is already the highest paying firm, there's no chance. If it's average, there's a 50% chance.

Besides, the way the question is phrased, I'm not voting to either take a pay cut or be laid off. I'm voting to take a pay cut or risk a 10% chance of being laid off.


OK, let me phrase the same question differently. Let's say we're playing two handed poker. I put up $100 and you put up $1,000. You have a 90% chance of winning my one hundred dollars and a 10% chance of losing your thousand. We keep playing this way until I decide to stop.

Would you take the bet? Or would you say no way.
 
OK, let me phrase the same question differently. Let's say we're playing two handed poker. I put up $100 and you put up $1,000. You have a 90% chance of winning my one hundred dollars and a 10% chance of losing your thousand. We keep playing this way until I decide to stop.

Would you take the bet? Or would you say no way.

I wouldn't ever take it. Statistically speaking, over 10 hands I win $900 and you win $1000. Since you will keep playing enough times to smooth out a few lucky hands, you will come out ahead in the end.
 
I wouldn't ever take it. Statistically speaking, over 10 hands I win $900 and you win $1000. Since you will keep playing enough times to smooth out a few lucky hands, you will come out ahead in the end.

Exactly. Using the full wage as the metric, he loses over time and I gain.

If we used the reduced wage as his wager (900), he'd break even over the long haul. But since he can't control when the game ends (just like being unemployed), I'd just wait until I got a string of luck (a couple wins in a row) and then pull out causing him to lose money and me to gain it.


I could keep it up all day since I'm not risking that much each hand, but stand to gain a lot if it hits a couple times in a row. He's risking a ton for the best case scenario of small gains or breaking even.
 
It depends. The problem with pay cut is that they have to reduce the amount of hours. If the industry wasn't doing that well, then a lot of people keep working lower amount of hours after the crisis. Layoffs are good, because it makes people go from one unproductive industry to a more productive one.

I didn't have this thought in my mind when I voted though.
 
Paycuts are typically the better option in a recession. Laying people off means you lose their productivity, which can easily cancel out the money saved getting rid of them, especially in the long term. Furthermore, because of wide spread economic downturns, you aren't likely to lose employees to other companies even with reduced pay.

Well, during recession productivity increases due to the ever realistic presence of layoffs. For the employee, it is to take a cut in pay. For the specific firm itself, it is to layoff 10%.
 
Well, during recession productivity increases due to the ever realistic presence of layoffs. For the employee, it is to take a cut in pay. For the specific firm itself, it is to layoff 10%.

How do layoffs increase production? You might increase profitability, typically only in the short term, but you generally can't get more revenue from less people.
 
It depends. The problem with pay cut is that they have to reduce the amount of hours.
Not necessarily. You can still have the same number of hours.
 
Since you said "I'm confident that I can find employment fairly easily, regardless of how bad the economy is." the assumption must be that there aren't systemic economic difficulties affecting other firms as well, otherwise your confidence is entirely misplaced.

Not necessarily. I'm confident I can find a job in any economic climate due to my skills and connections...but that doesn't mean I can make an employer overpay for my services. If the market just tanked and my job is worth 10% less than it previously was, that's the wage I'm probably going to have to settle for whether I stay at my current employer or not.

Tucker Case said:
Also, if you retain the job at the paycut, you have the luxury of looking for another job and holding out until you get one that pays the old scale or higher.

There's probably more than a 10% chance of pulling that off unless you currently work for one of the firms that have payscales in the top 10%.

The same could be said about any job though. There's always another job somewhere else that pays better. That's true whether I get a pay cut or not.

Tucker Case said:
OK, let me phrase the same question differently. Let's say we're playing two handed poker. I put up $100 and you put up $1,000. You have a 90% chance of winning my one hundred dollars and a 10% chance of losing your thousand. We keep playing this way until I decide to stop.

No, as that would be -EV for me. 90% of the time I get $100. 10% of the time I lose $1,000.

(.9)($100) + (.1)(-$1000) = -$10

On average I'm losing $10 every time I play this game. What does this have to do with the thread though?

Tucker Case said:
Where is that number coming from, just curious.

According to your numbers, a layoff would cost me somewhere between $1282 to $2564. But if I vote for the layoff, I'm only being laid off myself about 10% of the time. The other 90% of the time, it costs me nothing. So my expected loss is only:

(.1)(-$1282 to -$2564) + (.9)($0) = $128 to $256 on average
 
How do layoffs increase production?

I was not describing production, only productivity. None the less I will explain in a little more detail.

First we have to establish diminishing marginal product of capital. For the sake of simplicity, lets assume the stock of capital at a specific firm is constant in the short run. The more labor you add, the less alloted capital (Per worker) is availble to the specific firm. Y=f(L^x,K^y) : y+x<1 ; Assuming the capital stock is 10 and the labor force is 100, and the total factor productivity for labor is .4 and the total factor productivity for capital (K) is .5, the equation sets up as :Y=f(100^.4,10^.5) Y= about 20. Now let us assume a 10% cut in labor. Y=f(90^.4,10^.5) Y= 19.129. The change in output (.821) /new total output(19.129) = .0429 So, a change in 10 percent of labor has led to a decrease in about 4.29%


You might increase profitability, typically only in the short term, but you generally can't get more revenue from less people.

They are not laying people off to increase revenue levels. Remember, I was describing productivity, not total production. While production was decreased, the premise behind the layoff is expected decreases in customer demand. Keep in mind; this was a very crude and simplistic model for production and factor productivity.
 
The same could be said about any job though. There's always another job somewhere else that pays better. That's true whether I get a pay cut or not.

Exactly. Since you said that your confidence in finding another job is the qualifier on why you'd make the gamble of risking the layoff, and the above fact is true regardless of whether you get a pay cut or not, the smartest option is to take 90% in the interim instead of risking 100% in order to not have to look for one of those jobs and maintain the status quo.


On average I'm losing $10 every time I play this game.

My point is that it is a stupid bet because you will always come away losing over time. Actually, you break even over time.

It's always stupid to take a bet where you risk way more in each single instance than what you can gain when the ultimate best case scenario is breaking even.

Instead take the position that has no risk, because over time, there is no gain to be had in the other position.



According to your numbers, a layoff would cost me somewhere between $1282 to $2564. But if I vote for the layoff, I'm only being laid off myself about 10% of the time. The other 90% of the time, it costs me nothing. So my expected loss is only:

(.1)(-$1282 to -$2564) + (.9)($0) = $128 to $256 on average

No, if you fall into the 10% your expected loss is 100%. If you fall into the 90% our expected loss is 0%.

In the alternative situation, you are in the 100% with a guaranteed loss of 10%.

In each scenario, the long term results of repeating the gamble over and over again are a loss of 10%.

Thus, taking any risk at all for what over time equals the same situation isn't worth it. Let alone risking everything on it.

And since you have no control over when you'd get hired again, and at what pay scale you get hired at, your risking everything and then some.

If the ultimate result is that you end up with a job that pays 85% of what you made before the bet, you've got continuing losses on top of the short term losses.

Whereas you can always look for another job that pays more than what you will make with the pay cut while taking no risk at all.

The risk/reward equation means that this would always be a stupid bet except in scenarios where a 10% loss means your are totally screwed.

That's because it adds a "risk" value to the paycut that is equal to the risk value for the layoff. It also removes the reward side of the paycut scenario entirely (reward = guaranteed job) since the guaranteed job itself just means you are totally screwed with a job instead of being totally screwed without one.

This also adds to the reward side of the layoff scenario (reward = not being totally screwed).

In that case, the equation turns from high risk-low reward (for all people who wouldn't be totally screwed by a 10% paycut) to low risk-high reward (for those who would be totally screed by the pay cut).

Low risk-high reward bets = good. High risk-low reward bets = bad.



When you made your claim about risking the layoff, you were trying to alter your "risk" side of the equation with another bet of your own invention: the bet that you'll find employment quickly.

Using a secondary bet (of unknown odds) to justify taking on a high-risk primary bet with little to no reward is always the stupid move.

It does not actually decrease the risk. It is only an irrational justification for taking a bad bet to begin with.
 
Exactly. Since you said that your confidence in finding another job is the qualifier on why you'd make the gamble of risking the layoff, and the above fact is true regardless of whether you get a pay cut or not, the smartest option is to take 90% in the interim instead of risking 100% in order to not have to look for one of those jobs and maintain the status quo.

But if I'm confident I can find another job quickly and the pay cut will affect everyone, it can definitely be worth the risk.

Tucker Case said:
It's always stupid to take a bet where you risk way more in each single instance than what you can gain when the ultimate best case scenario is breaking even.

I agree. But I don't know where you're getting the assumption that breaking even is the best I can do by risking a layoff instead of taking the pay cut.

Tucker Case said:
No, if you fall into the 10% your expected loss is 100%. If you fall into the 90% our expected loss is 0%.

In the alternative situation, you are in the 100% with a guaranteed loss of 10%.

In each scenario, the long term results of repeating the gamble over and over again are a loss of 10%.

This isn't the correct way to look at it. You can't look at expected loss as a percentage instead of a dollar amount in this case. This isn't poker where you can compare each individual hand. It depends how long I'm laid off, how long my salary is reduced, etc.

Tucker Case said:
And since you have no control over when you'd get hired again, and at what pay scale you get hired at, your risking everything and then some.

This seems like quite an assumption. I have a great deal of control over when I will get hired again. I have comparatively less control over what pay scale I get hired at, but it seems reasonable to me that I could get hired at a job that pays a similar wage to what I'd be earning if I accepted the pay cut.

Tucker Case said:
If the ultimate result is that you end up with a job that pays 85% of what you made before the bet, you've got continuing losses on top of the short term losses.

You seem to be operating under some assumptions that I don't think I agree with, so let me lay out the assumptions I'm making.

1. Suppose I'm currently earning $1,000 per week to make the math simple.

2. I could take a salary cut and earn $900 with 100% certainty. If I choose this option, my expected loss is $100 per week, until I find a better job or until the pay cut ends.

3. I could risk a layoff. Assuming your numbers about DC's unemployment benefits are correct, I would earn $359 per week 10% of the time, and $1000 per week 90% of the time. If I choose this option, my expected loss is $64 per week, until I find another job.

...So starting off (before we even look at any other variables), the layoff is better than the pay cut, from a purely EV standpoint. But there are some other assumptions that make the layoff even MORE desirable relative to the pay cut.

4. I could find another job more quickly if I was laid off than if I took a salary cut. I would have more time and I would be more motivated. Additionally, I'm assuming that I could find a job of comparable pay REGARDLESS of whether I sought it out because I was laid off or because my salary was cut (i.e. the pool of jobs available to me would be the same in either case).


So all things considered, I'd much rather risk the layoff. My expected weekly loss is lower, and I could reasonably expect that it would last for fewer weeks than the pay cut. If it took me 4 weeks to find a job if I was laid off, and 8 weeks to find a job if I took the pay cut, my total expected loss would be $256 with the layoff and $800 with the pay cut.

Of course, as you mentioned the level of risk is important. Maybe some people in that situation would be more conservative and would prefer the low-risk / low-reward pay cut. But I'm in my 20s, don't have a family, and have enough resources that I could survive a layoff if necessary. So in my case, I'd definitely prefer to risk the layoff. The expected value is FAR better.
 
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3. I could risk a layoff. Assuming your numbers about DC's unemployment benefits are correct, I would earn $359 per week 10% of the time, and $1000 per week 90% of the time. If I choose this option, my expected loss is $64 per week, until I find another job.

...So starting off (before we even look at any other variables), the layoff is better than the pay cut, from a purely EV standpoint. But there are some other assumptions that make the layoff even MORE desirable relative to the pay cut.

this is the assumption that makes no sense. The number you provide doesn't exist in reality. Your expected loss is either 0 or $641 per week. It's not 10% of the layoff total.

The part I've put in bold is just silly. It makes no sense whatsoever. When you put the "until I find another job" in there, it is always in cases where you HAVE received the layoff. Then your guaranteed losses are $641 per week. It could be up to $1000 per week while you are trying to get unemployment. If you do get the job quickly, you might not get the unemployment. If it takes two weeks to find another job, your guaranteed losses are $2000.

When you say you can find a job more quickly if you are laid off, that's not necessarily true. You are making a gamble that you'll find a job quickly in the first place.

As you've pointed out, if the situation means a systemic decline in the industry, that is an asinine assumption to make. The other firms may also be laying people off and there will be a glut of people applying for the same jobs as you are.

It's a terrible assumption to make because you are basing your risk assesment on the BEST case scenario instead of the WORST case scenario in an economy where the worst case scenario is the more likely one.

But as you've also said:

"It depends how long I'm laid off, how long my salary is reduced, etc."

I worked out the numbers earlier. If you are only off for two weeks, and thus don't end up getting unemployment, you lose $2000. That's just two weeks. And you won't know how much you are making and have no control over it.

Which means that comparatively, taking the layoff gives you 20 weeks to find a specific job that pays more than you make at the reduced pay, preferably back at your original level

20 weeks. About 5 months. And that breaks you even from a two week layoff, but gives you a better final result (a job that pays the old wage). You maintain control over what job you eventually accept, guaranteeing that the only type of job you will accept pays more than what you will be making at reduced income and preferably as much or more than what you made before the cut.

And you'll have 18 more weeks to take care of it.

Since you are operating under the assumption that you'd find work quickly in the worst case scenario, you should be able to find a better paying gig in five months. You are in such high demand that you are willing to put it all on the line based on how quickly you'll be able to find a job while unemployed. If you can't find a better paying gig in 5 months of looking, then that assumption must be pure mythology, which makes risking the layoff an even greater risk.
 
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