WASHINGTON (AFP) – The United States (US) jobs engine has continued to deliver for nearly a decade, putting more Americans back to work and sending unemployment to a historic lows.
But, just over a year after Congress enacted sweeping corporate tax cuts meant to jolt the economy, a shadow has crept into the picture: Layoffs are also on the rise.
While claims for unemployment benefits remain low, major companies have begun to swing the axe even as many enjoy the tax windfall and solid profits, and are spending record amounts of cash to buy back their own stock from investors.
In February alone, layoffs were announced by PepsiCo, the video-gaming giant Activision Blizzard and the cosmetics marketer Avon.
General Motors enraged President Donald Trump in November by announcing a 15 per cent cut to its workforce while shuttering auto plants in the political battleground states of Ohio and Michigan.
Economists said tax cuts often fuel investments like mergers and acquisitions, which frequently result in job cuts – at least initially – as some workers become redundant.
Automakers, toy manufacturers, banks, tech firms and telecommunications giants are trimming their workforces.
Job cuts jumped 29 per cent last year in the wake of the tax reform to about 540,000, the highest in three years, according to Challenger, Gray & Christmas, an outplacement firm that tracks staff reductions.
And job cuts in January hit 44,653, higher than 20 of the prior 24 months, the firm reported.
Despite the increase in layoffs, first-time claims for jobless benefits have risen only slightly in recent months – suggesting the current US jobs market is so hot many laid-off workers find new jobs even before they need to claim unemployment insurance.
The economy created over 220,000 new jobs each month on average in 2018, up from about 180,000 in the prior year.
The reasons driving layoffs vary.
Banking giant Wells Fargo announced in September it was cutting five to 10 per cent of its workforce as it focussed more on Internet banking.
And some firms shed workers because they worry the economy could hit a rough patch in the near future or are seeing rising raw material costs, John Challenger, the employment firm’s CEO, told AFP.
But as more companies merge, more employees become redundant: Combined firms no longer need two departments to handle accounts payable, human resources or IT.
“You see layoffs occur that aren’t really about the slackening of business conditions,” Challenger said.
“You don’t need full-scale vertical operations in as many locations as banks get bigger and core functions get moved to headquarters.”
The value of mergers and acquisitions in the US jumped 17 per cent last year to USD1.94 trillion, the second highest since 2000, according to financial data firm FactSet.
Edward Rice, Professor of Finance at the University of Washington who has studied the effect of tax cuts on corporate behaviour, told AFP his research shows tax cuts tend to produce mergers and acquisitions that were more profitable.
He acknowledged those corporate combinations could cut jobs initially, but argued that over time healthier companies could hire more.
“The idea of the merger is that somehow the firm’s going to get more efficient and grow faster. So there may be a saving in employees now but a gain in employees later,” he said.
However, Professor of Accounting at Stanford University Rebecca Lester said tax cuts sometimes have failed to produce the desired outcome.
A popular corporate tax cut in 2004 – intended to reward companies with activity and workers in the US – actually caused some firms to increase investment abroad while others reduced their US workforces, her research showed.
“The rhetoric was, we want to increase jobs, we want to increase investment here in the US,” she told AFP. But “it can be quite difficult to get those outcomes.”
Douglas Holtz-Eakin, a prominent Republican economist who favoured the 2017 tax overhaul, acknowledged that despite the lower tax rates, businesses slowed their investments in new equipment and machinery in the later part of 2018, something he called “very disappointing”.
But he said the number of layoffs by itself was not the best yardstick for measuring the impact of the tax cuts.
“The ultimate test is, do we see higher levels of investment that produce better productivity and wage growth?” he said.
“We shouldn’t care which firm employs somebody. We should care that they are employed at good and rising wages.”