When do workforce reductions pay off? A question of size and slack in privately held firms

Abstract Workforce reductions are associated with lower human capital and opportunity costs, which negatively affect firm performance, but at the same time reduce wage costs. We investigate the impact of workforce reductions on firm performance for privately held firms. We examine whether slack (or excess) resources help firms cope with the internal disruptions caused by workforce reductions. Our results, based on a sample of privately held Spanish firms, show that workforce reductions are associated with lower sales revenues. For small and medium‐sized enterprises (SMEs), workforce reductions are further associated with lower profits. In contrast, the presence of financial slack leads to an increase in operating profits following workforce reductions. The implications for theory and practice are discussed.