The furlough system can make a huge difference to businesses as it has been found that letting employees go during the COVID-19 crisis could be far more damaging than doing so during the financial crisis of 2008.
This is according to Deutsche Bank’s report, “Furloughs, layoffs, and recovering from Covid-19” which found that a business’s recovery following the financial crisis was directly correlated to its staffing decisions. The bank suggests that in order to “navigate” through the COVID-19 crisis, they should avoid letting workers go.
The report does state that companies are in “better shape” to withstand the COVID-19 crisis than the financial crisis, but have more to lose from letting staff go.
The bank believes that companies are in a stronger position to withstand a crisis now, even before the current stimulus packages were put in place.
It was found that US companies who let the least amount of people go during the financial crisis, saw their profits grow by nearly double the rate compared to businesses who let large amounts of employees go.
Luke Templeman, research analyst at Deutsche Bank said:
Perhaps the biggest difference between the financial crisis and today is the huge increase in furloughing rather than permanent layoffs.There are three reasons for this: most economists and firms expect the Covid-19 crisis to be short, albeit deep; there is a greater risk of reputational damage in laying off staff; and staff have increasingly become more important to companies.
Large US companies now make £44,500 per staff member each year, which is a large increase from £31,000 during the boom period before the financial crisis. European companies tend to make, £29,000 per staff member.
The report also states that large poor-performing firms may actually have the most to gain from the current situation if they were to increase the efficiency of their hiring decisions.
Deutsche Bank’s report used S&P 500 and Stoxx 600 companies to gauge the impact of these events in the US and Europe respectively.