Investing for Keeps: Pre-Pandemic Investments in Human Capital Reduce Workforce Reductions Associated With COVID-19 Financial Pressures25

Management & Human Resources

Speaker: Rebecca Kehoe

Cornell University, ILR School

Abstract

We examine how firms’ pre-pandemic investments in human capital influence their use of workforce reductions as a response to financial pressures during the COVID-19 pandemic. We contend that workforce reductions must be examined in the context of firms’ broader financial and resource orchestration environments. First, we suggest that the financial pressures facing an organization will determine its need to cut costs during the pandemic. Second, we argue that a firm’s prior investments in employees’ human capital will reduce the attractiveness of workforce reductions as a strategy to cut costs, as human capital investments (HCI) increase the value of employees’ knowledge, skills, and abilities and motivation, thus inducing firms to seek alternative measures to address financial pressures. We then argue that the attenuating effect of HCI will be stronger when HCI is matched with investments in complementary resources (i.e., physical capital) and with the service requirements of a firm’s client mix (i.e., with commercial clients’ needs requiring more sophisticated and firm-specific KSAs), as employees’ human capital will create more value– and will translate to a bigger loss following employee departures – in such circumstances. We demonstrate support for our hypotheses in a sample of 1,364 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 fourth quarter of 2020. We discuss implications for our understanding of the impact of the COVID-19 pandemic on organizations and employees and for research on resource orchestration and human capital.