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Anticipating plant closures: the role of advance notification

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6 Internal effects of disclosure

Stakeholders can be found inside and outside of the traditionally defined corporation. For some stakeholder groups, these boundaries are not well demarcated. Temporary or part-time workers or those represented by strong national unions may face the dilemma of divided loyalties. Nevertheless, employees tend to have relatively direct contact with managerial representatives of the firm. They also have access to the plant-specific rumor mill and tend to be notified about organizational changes before the public, although the extent of this information advantage appears to be diminishing. The mandate of formal, advanced notification of workers and public agencies will tend to reduce this advantage further.

The effects of mandatory advance notice on employees will therefore depend on the actual change in the timing and quality of available information. If wage levels, for example, reflect in part a premium for risk that is de facto reduced by the guarantee of pre-plant-closing notification, then one would have to expect a reduction in equilibrium wage levels. However, such marginal responses would be difficult to pinpoint empirically, since wages respond to complex sets of variables.

More tangible may be the effect of advance notification on the timing of the search for an alternative job thereby reducing the period of unemployment.

The best time to undertake programs of job search assistance, counseling, and retraining for workers is prior to their displacement. In most cases, this can occur only with the cooperation of the employer.. (including) advance notice to workers of impending plant shutdowns.. The efficacy of predischarge help reflects the tendency of workers to disperse after layoff.. (Cyert and Mowery, 1987, p.155).

There is evidence of a positive relationship between length of advance notice and the success of finding other jobs (Yemin, 1982; Howland, 1989). Advance notice will also "give workers a chance to adapt their expenditure pattern and family plans to an upcoming period of financial stringency" (Howland, 1989). Howland's (1989) analysis, however, also suggests, somewhat disturbingly, that blue collar workers gain relatively little if anything from advance notices, while white-collar workers benefit, both in terms of reduced periods of unemployment and in terms of regaining pre-layoff wage levels. This latter finding would suggest that prior notice might prevent the disruption of career patterns planned by the individual. Unexpected layoffs may make it difficult or impossible to implement the lead times needed to secure equivalent career steps or to secure the next link in the internal or external labor market "channel" (Maillat, 1984). The fact that skill and channel specifications are frequently company- or location-specific introduces additional rigidities which can be more readily overcome through early warning systems.

At the plant level, lack of prior notification may preclude internal, worker-initiated, alternative ways to face the firm's problems including wage concessions, productivity increases or employees' capital infusion or outright buyouts (Howland, 1989).

On the other hand, it has been proposed that, once the required announcement has been made, productivity will suffer due to reduced morale and the ability of the most able employees in key positions to 'jump ship' and to find quickly other jobs before the plant is actually closed (OTA, 1986). However, the available evidence does not seem to support the notion of decreased productivity. High-quality employees often stay on to the end, possibly in the hope of eventually being retained by the parent organization (Slote, 1969; Sutton, 1988). Most people with practical experience, Including business spokesmen, report that productivity, quality, and even safety records have all improved during the period of notice"(OTA, 1986, p.3). This evidence is consistent with the argument that the threat of unemployment enforces a more disciplined work climate (Offe, 1985).


7 Local propagation effects

Any advance notification would be motivated primarily by the benefits of allowing employees, labor unions and local employment agencies to develop early adjustment plans for the directly affected labor force.

Employers' cooperation with the local employment office is the determinant of success of an advance notice system, for it would be the purpose of such a system to enable state employment services to obtain from employers statements of plans to introduce technological change... A successful advance notice system would permit early identification of a scheduled technological change; it would enable local offices. to assist employers in filling new jobs and assist workers in maintaining their continuity of employment... (Liebhafsky, 1963, p.319)

While the demand for assistance in finding or retraining for new jobs peaks right after plant closure or layoff, it "takes about 2 to 4 months' work ... to prepare a comprehensive adjustment program, including testing and assessment, counseling, job search skills training, job development, vocational skills training, and remedial training." (OTA, 1986, p.1).

To what extent are other, "indirect", especially local, stakeholders benefiting from advance notification, and are there alternative information sources for forming anticipations about the future of a plant? Little attention has been given to the information needs of these local stakeholders who lack whatever informational privilege employees may have, yet may be similarly affected by a plant closure. Unlike shareholders and other corporate investors, they tend to be less interested in locally available information about the corporation as a whole than in how local interests will fare relative to the treatment afforded to other corporate segments or localities (Gray et al., 1981).

It is interesting to note here that the WARN ACT (1988) makes only a halfhearted effort to recognize an expanded stakeholder concept. While it requires notification of local governmental units [Sec. 3(a)(2)), and while this mandate might indicate a concern for local, indirectly affected non-employees the provision concerned with penalties for non-compliance [Sec.5 (a)(3)] shows that the accountability to local governmental units is based on a desired protection of employees only, not that of other affected, external stakeholders.

Can more information destabilize the local economy as the result of actual or potential impacts it may have on others? The argument has been made that advance notice will speed up the processes leading to closure by driving customers away and alerting banks (OTA, 1986). The WARN Act [1988, Sec.3 (b)] specifies that an employer may be exempted from the mandate if he/she is in the process of "actively seeking capital or business which, if obtained, would have enabled the employer to avoid or postpone the shutdown." However, this provision applies only to single site shutdowns and only if "the employer reasonably and in good faith believed that giving the notice required would have precluded the employer from obtaining the needed capital or business."

Since little is known about the formation of local economic expectations, there is hardly a basis for suggesting more than that advance notification could be a stabilizing, destabilizing or neutral force. It might be safe to suggest that the potential for destabilization would exist where the announcement involves a very substantial and/or unexpected layoff, coincides with similar announcements involving relatively large percentages of the local labor force or where such notices are paralleled by pessimistic national economic forecasts. Thus, local adjustments may occur already in anticipation of some actual multiplier or linkage effects, particularly in local "bust" contexts, thereby accentuating downward trends. Source, timing and accuracy of negative disclosures will tend to have a bearing on such effects. Stakeholders' cumulative experiences with the ex post accuracy of advance layoff notices or other corporate disclosures may influence the extent to which such signals will be taken seriously in the future.

On the other hand, the sporadic news of a relatively isolated and limited case of employment reduction in an otherwise healthy economy will more likely be interpreted by other employers as an opportunity for expanding employment and, instead of initiating downward multiplier and accelerator processes, create counteracting and compensating effects.


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