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July 11, 2001
Economists Challenge Challenger
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The economists note that while the firm's monthly releases rely on announced cutbacks, they don't correspond with the layoffs that actually occur, according to the Journal. The economists add that such surveys should never be used to predict unemployment.
Nonetheless, the Challenger surveys have been widely disseminated in the media since their launch in 1993. This spring, "The CBS Evening News with Dan Rather" used a survey as the lead story of one evening's newscast.
The New York investment firm Lehman Brothers gave the Journal a simple explanation for the surveys' popularity: "Layoff announcements have captured the attention of the popular press, as nothing sells like bad news."
The Challenger report provides "color" on the labor market, but "in predicting what the payroll numbers or the unemployment rate is going to be, it's almost useless," says Joseph Abate, a senior economist at Lehman Brothers, who authored a study on layoff announcements.
"Those Challenger numbers aren't all they're cracked up to be," says Sophia Koropeckyj, a senior economist with Economy.com, a West Chester, Pa., economic research firm. "I'm not going to badmouth them, but you have to understand the limitations [the reports] have," she says.
The Lehman Brothers study, published in February, shows that Challenger's monthly totals of mass layoff announcements, while creating headlines, rarely move in tandem with unemployment indicators.
Since 1993, the study found, there has been almost no correlation between Challenger's mass layoff announcement tally and the national unemployment rate or change in payrolls calculated monthly by the U.S Labor Department.
Indeed, the correlation has been mostly negative, meaning that the mass layoff announcement total often moves in the opposite direction of the monthly unemployment rate and change in payroll numbers.
And then there's a recent study by the Employment Policy Foundation, a research group in Washington, D.C. It found that the total number of employees affected by mass layoff announcements as tallied by Challenger in March 2001 was 300 percent higher than the total Challenger had reported in March 2000. Yet the number of people affected by mass layoffs as counted by the Labor Department's Bureau of Labor Statistics (BLS) rose just 24 percent.
The BLS tracks unemployment claims stemming from mass layoffs, which are defined as more than 50 people losing jobs from the same establishment.
Based on its research and interviews with economists, the Wall Street Journal listed these problems with the Challenger surveys:
- The reporting methodology is statistically unreliable. The firm says it gathers its monthly figures from "public announcements by companies and by various sources" including the Internet, then tallies them in-house. But it doesn't follow up with companies that have announced layoffs to verify the accuracy of its reporting or to find out how and when the cuts will occur.
Thus, if the announcements are misreported in the media, or if the cuts don't occur, the Challenger numbers are wrong. "The company may not end up cutting as many jobs as it said it would, or there are occasions where there are erroneous press announcements," Koropeckyj observes.
- Company layoff announcements seldom correspond with the number of employees who actually lose jobs. Employers are encouraged to issue public statements about layoff plans under the Worker Adjustment and Retraining Notification (WARN) Act, passed in 1988, even if their plans are tentative or will be carried out over a long period. But they may subsequently change their minds about the layoffs or find other ways to reduce payrolls without firing employees.
In addition, some economists believe that many companies announce plans to cut payrolls primarily to please investors and that actual job reductions may be fewer. "In making these announcements, [companies] look like they're making some effort to cut costs," says Koropeckyj. "The company doesn't want to mislead, but usually the severity of the action isn't as big as the press makes it out to be."
Challenger CEO John A. Challenger dismisses the notion that companies make layoff announcements to appease investors. "Shareholders will realize pretty quickly that the cost cuts didn't take place, plus the work force is under a cloud" after a layoff announcement, he tells the Journal. "The damage to morale after you announce a layoff is very high, and the idea that a company would take that on to appease Wall Street is nuts."
- Announced job cuts usually occur worldwide, but published reports of layoff totals make it seem as though the planned firings are U.S.-based.
Among staff reductions at Lucent and Novell, about 25 percent will be eliminated overseas. In the past year, Cincinnati-based household-goods maker Procter & Gamble Co. has announced plans to reduce its work force by 17,400. However, the bulk of P&G's job cuts - 11,800 - will occur overseas, The Wall Street Journal reports.
Challenger says that including job cuts that occur overseas makes his report valuable, since it describes what U.S. companies are doing in an increasingly global economy. Further, he says, "there are a lot of U.S. citizens working abroad that are losing jobs."
- Often, job cuts are accomplished through attrition or retirement and occur over long periods. For instance, Proctor & Gamble's July 2000 announced plan for 7,800 layoffs has yet to be completed. "When [a company] says it's laying off 10,000 people, the action could be spread out over three years," says Ron Bird, chief economist for the Employment Policy Foundation.
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Challenger says that distinguishing between a firing and voluntary retirement isn't important when discussing layoffs. "Through any method, it's the job loss they have to deal with," he says.
- Many companies are simultaneously hiring while shedding workers, so their overall employment remains constant or may actually rise.
Frequently, companies hire in new areas as fast as they downsize in others, or transfer employees affected by cuts to growing sectors, economists tell the Journal. According to the Employment Policy Foundation, since 1995, the net average change in employment for firms reporting layoffs is close to zero. "You have simultaneous layoffs and new hiring going on, because successful companies often expand new operations while simultaneously cutting back in others," Bird says.
Challenger counters that his report doesn't offer an erroneous portrait of the economy. Without being specific about his report's methodology, he says the monthly tallies are a good indicator of corporate America's general employment activity.
The report "helps people to see what companies are planning to do in regard to the size of each company's work force," he says, adding that it generally portrays "what U.S. companies are doing."
To view the Wall Street Journal story, click here.