Cost is an important factor that has to be managed well to ensure that organizations remain profitable. Labor costs form a major factor that increases the total costs of an organization. When there is a need to lower labor costs, the available options are that an organization can decide to lower the wages or lay off some employees. Each decision has some challenges when it comes to its implementation (Mcgregor, 2009). The best decision that can be adapted is lowering the wages that are paid to the employees.
First, choosing to lay off some employees would mean that a choice has to be made on which employees are to be laid off. Talented employees can be lost by an organization, and if they are employed by competing firms, trade secrets would be lost, and an organization can lose its competitive abilities. Laying off some employees would leave other workers with a lot of fear, feeling that they may be the next to be laid off. Terminating some employees may also lead to some legal cases that may necessitate compensation by the organization to the laid off workers for the breached contract (Boyes, 2013).
On the other hand, the decision to cut the wages for all the employees through a mutual process of understanding where new contracts are signed lead to greater satisfaction. If every employee including the management takes some cut, everyone would feel to be a valued employee in the organization and are not just objects used by their organization for its own goals. The employees, in this case, can have the hope that when the business turns around in the future, then their pay can be an increase. The employees can also achieve a greater level of satisfaction if they work in shifts such that they do not feel overworked at their lower salary level. The organization can also eliminate some of the benefits that are accorded to the employees and contribute to their total pay (Boyes, 2013).
Retaining all the employees is a noble decision because they do not feel demoralized and are not left to wonder where they can secure jobs next. This is regardless of the fact that resistant to wage cut is expected, and some employees may be willing to leave their jobs and seek alternative jobs. Such acts leave less negative effect to the organization as compared to when there are layoffs.
Economies of scale refer to the theory that when an organization diversifies its production activities, it is likely to lower the costs of production. This is especially the case when the goods that are involved are complementary to each other. The expertise that is needed as well as storage costs is lowered. An example is a company that produces toothbrush and toothpaste. Such a company can lower marketing costs as well as storage costs and the costs of packaging if the products are packed together (Chandler, 1994).
Economies of scale, on the other hand, is based on the lower cost per unit as the output produced is lowered. This is based on the fact that the fixed costs do not change as the total output increase, and this means that unit cost reduces as output grows. An example is a company that produces cars and increases its production volume. In such a case, the costs of rent remain the same, and this means that the unit cost for the vehicles reduce as more vehicles are produced (Chandler, 1994).
Boyes, W. J., & Melvin, M. (2013). Economics. Australia: Cengage Learning South-Western.
Chandler, A. D., & Hikino, T. (1994). Scale and scope: The dynamics of industrial capitalism. Cambridge, Mass: Belknap Press of Harvard University Press.
Mcgregor J. (2009). Cutting Salaries Instead of Jobs – Bloomberg.