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Layoffs result in hidden costs that leaders overlook, like productivity declines.
In the last week alone, PwC announced layoffs amounting to 2% of its total U.S. workforce (about 1,500 jobs), while Panasonic said that it would eliminate about 4% of its total workforce (about 10,000 jobs) in fiscal year 2026. When faced with economic challenges or pressure to boost quarterly earnings, many Fortune 500 leaders turn to layoffs as their first cost-cutting measure. On paper, fewer employees equals lower payroll costs and improved efficiency. But what if the true cost of layoffs is significantly higher than initial estimates?
Before organizations initiate layoffs, executives should consider these seven hidden costs that could transform short-term savings into long-term losses.
Layoff Cost #1: Severance and Administrative Expenses
Recent research by Orgvue, a leading organizational design and planning software platform, reveals that for every $1.00 companies save through layoffs, they actually spend $1.27 when accounting for hidden costs. Orgvue's analysis of Fortune 500 annual reports found these companies spent a whopping $45 billion on severance packages in 2024 alone. "Organizations should be cautious if the aim is cost-cutting," warns Oliver Shaw, CEO of Orgvue. "We know that reducing the workforce often causes the organization to incur more costs than savings during the 18 months following a significant transformation of this type."
Beyond severance, substantial administrative costs include planning, communication, and paperwork. Many Fortune 500 companies also hire external statisticians or employment attorneys to analyze the demographics of planned layoffs. This analysis is often done to ensure compliance with employment laws and avoid potential discrimination claims.
Layoff Cost #2: Workforce Productivity Decline
After layoffs, employee productivity typically plummets. ActivTrak, which monitors worker activity for thousands of employers, found that after layoffs, individual employee productivity fell by nearly an hour a day on average, about 18 hours per month. For a company with 100 employees, this translates to more than $50,000 a month in lost productivity. While productivity generally returns to pre-layoff levels within a few months, that's still a substantial hidden cost that leaders rarely factor into layoff decisions. This productivity decline stems from several factors:
Workplace morale deteriorates
Remaining employees absorb additional responsibilities
Teams become anxious about future job security
When employees question whether their leaders truly value them, their enthusiasm and dedication suffer.
Layoff Cost #3: Voluntary Departures and Replacement Costs
The most significant hidden cost comes from the exodus of talent that follows layoffs. Research by management professors Charlie Trevor and Anthony Nyberg found that after a 10% workforce reduction, voluntary turnover increases by 49%. This means that for a 10,000-employee company with an average turnover rate of 19%, an additional 931 employees will quit following layoffs. Replacement costs averaging 1.25 times an employee's salary could cost the company over $75 million, far exceeding any short-term savings from the initial job cuts. Shaw emphasizes, "Tie this together with skills, intelligence and performance. It could be you risk losing skills and knowledge you may need—if you can identify this, you can avoid expensive rehire costs."
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