Prior Investments in Human Capital Reduce Layoffs Associated with COVID-19 Financial Pressures

Abstract

This study examines how a firm’s pre-pandemic investments in human capital and physical capital influence its likelihood of engaging in layoffs in response to financial pressures in the early periods of the COVID-19 pandemic. Building on insights from the resource orchestration literature, we contend that layoff decisions must be examined in the context of firms’ path-dependent resource orchestration activities and in light of relevant environmental pressures. We specifically argue that firms with higher levels of pre-pandemic investment in employees’ human capital will be less likely to engage in layoffs in response to pandemic financial pressures based on the increased value embedded in their employees’ knowledge, skills and abilities (KSAs) and motivation. We further argue that firms’ pre-pandemic investments in physical capital will strengthen the mitigating effect of human capital investments on the likelihood of layoffs due to the complementarities that are likely to develop in the course of a firm’s concurrent investments in these two types of resources. We demonstrate support for our hypotheses in a sample of 709 U.S. banks using data from quarterly Federal Deposit Insurance Corporation (FDIC) reports, news articles, and Worker Adjustment and Retraining Notifications (WARN) Act filings through the second quarter of 2020. We discuss implications for our understanding of the impact of the COVID-19 pandemic on organizations and employees, for research examining how organizational factors shape the likelihood of layoffs in a crisis environment, and for research on resource orchestration and human capital.