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Harvard Business School Professor, former Medtronic CEO

U.S. Economic Outlook Under Coronavirus Hinges on Layoff Decisions

The U.S. economic outlook hangs in large part on whether business leaders respond to the new coronavirus crisis as they have with many past shocks: by laying off masses of American workers.

So far they have largely avoided the tactic. But the pressure on companies to squeeze costs is building as consumers, governments and others pull back on activity. Purges of workers could become unavoidable in some industries such as shipping, air travel, retailing and dining as demand slows.

Some of the hardest hit industries for now are looking to alternatives to layoffs. Walt Disney Co. said Thursday it would pay workers while theme parks are closedUnited Airlines Holdings Inc. announced a hiring freeze but not cuts; Chief Executive Oscar Munoz said he would cut his own pay insteadHyatt Hotels Corp. is freezing hiring but not firing, and cross-training and redeploying staff. Lyft Inc. said it would offer financial support to drivers who become ill or are quarantined.

Microsoft Corp. has said it will continue to pay 4,500 hourly workers employed through vendors who clean offices and work at cafes—at a time when more than 80% of Microsoft’s direct Seattle-area employees are working remotely.

Business leaders “are thinking about making sure they come out of this with a good reputation,” said Lloyd Blankfein, former chief executive of Goldman Sachs Group Inc. “You want to be perceived as someone who does the right thing.” At the same time, Mr. Blankfein said, industries that are hit hardest by the virus need to prioritize surviving the shock, even if it includes layoffs. “If it is an existential risk, you have to do it,” he said.

There have been 633 layoffs directly tied to the coronavirus as of Thursday, according to outplacement firm Challenger, Gray & Christmas. Almost half of those were in the entertainment and leisure industry and another 145 were tied to drivers accepting freight at the Port of Los Angeles, where shipments from China have slowed, the firm said.

That is a small slice of those who lost jobs recently. Last week, 211,000 Americans filed for first time unemployment benefits, the Labor Department said Thursday. It was the second straight week the layoff proxy declined—the figure is trending near a 50-year low. By contrast, three weeks after the Sept. 11, 2001 terrorist attacks, claims had jumped 30% to more than a half million.

Simone Barron this week lost her job as a server, at least temporarily, when Seattle restaurants Carlile Room and Cuoco said they were closing for eight weeks or more.

“It’s weird. I keep feeling like I have to go to work but there’s no work to go to,” said Ms. Barron, who used to bring in around $3,500 a month serving Italian food and small plates to patrons.

She has thought about looking for other work, but doesn’t have a car to cash in on the increased demand for delivery services. “What am I going to do, work online? Do I learn coding now?” she said. “What jobs are we going to have to go back to? That’s what’s scary to me.”

For millions, the big problem right now isn’t a lost job, it is reduced hours or income.

T.J. Masters, a freelance sound engineer in Austin, Texas, said he lost 10% of his annual income when the city canceled this month’s South by Southwest festival, where he was scheduled to work. He is fearful other events will also be scrapped. “The people on the lower end of the income scale are hurt worst,” he said, noting that as a freelancer his understanding is that he isn’t eligible to file for unemployment benefits. “It’s a tale as old as time, or at least as old as capitalism.”

If layoffs accelerate, they could help turn a slowdown into recession by squeezing household incomes and denting consumer confidence, leading to less spending and a self-feeding cycle of additional cost-cutting.

Boardrooms have reason to be wary of mass cuts. Business leaders have complained for years about trouble finding workers. If the health scare passes and demand returns, they could find themselves even more short of labor and facing a resentful public for flinching in the face of a short-term profit scare.

“If they lay off workers with hard-to-find skills, they may not be able to replace them as the economy improves,” said Wayne Cascio, a professor at the University of Colorado Denver who studies layoffs.

Their reputations have also been scarred from years of outsourcing, public disappointments from previous crises and rising executive pay. Gallup surveys show that 58% of Americans in 2020 distrusted big business. That has helped to fuel populism on the left and right that is making boardroom behavior a more common target of political backlash.

During the past quarter-century, layoffs became a routine in crisis management. Within a few days of the Sept. 11 attacks, for instance, U.S. airlines laid off more than 80,000 workers. During the month that Lehman Brothers collapsed, September 2008, private businesses reduced payrolls by 430,000 and escalated the cuts in the months that followed.

In the past week, airlines have frozen hiring and offered unpaid leave to employees to conserve cash. Companies and unions say carriers hope to make it through without mandatory furloughs. The industry was already facing a shortage of pilots and a wave of retirements in the coming years, making it reluctant to let go of workers.

Carriers have tried to reassure investors that they are in a better position to survive a downturn than in the past. U.S. airlines have been churning out profits for a decade—a change from dramatic boom and bust cycles. As a result, airlines say they have ample cash cushions, manageable debt levels, and access to more capital if they need it.

Southwest CEO Gary Kelly told employees on Monday the airline is contending with a “breathtaking” reversal, but that furloughs are a last resort. “I can’t promise you we won’t have to ground airplanes and furlough employees, heaven forbid that. I can promise you it will be the last thing we do, not the first,” he said.

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Temporary workers and part-time workers could be among the first casualties of the slowdown, said Bill George, a management professor at Harvard Business School and former CEO of medical-device maker Medtronic PLC.

“People will lay off and they will lay off the easiest to lay off,” he said. As a chief executive, he said he kept 10% to 15% of his workforce flexible—meaning part-time or temporary workers who could be cut in a crisis.

Jobs in the temporary-help sector dropped by more than 15% from a year earlier after Sept. 11 and by more than 25% from a year earlier after Lehman’s collapse.

He said he thinks some of the hardest-hit industries will end up pulling the layoff lever. “If you’re a restaurant and business is down 30 to 40%, you don’t have a choice. You have got to lay off people,” he said.

Microsoft is hoping to go a different way.

“These are the kinds of times that define the character of a company,” Microsoft President Brad Smith said in an interview. “People want to work for an employer that cares about the bottom line and the well-being of its employees.”

Mr. Smith said many hourly workers live paycheck to paycheck. He said hourly Microsoft workers elsewhere will also be paid, as will employees at Microsoft stores should they close.

What’s the mood in your workplace? Are potential layoffs causing anxiety for you or your colleagues? Join the conversation below.

“We can afford to take this step, and we’re sensitive to the fact that smaller businesses might not be able to do so,” Mr. Smith said.

In Washington state, which was the first to report cases of the virus, warnings by companies pointed to layoffs of 2,252 workers in 2020 through the first week of March, down from 2,774 in the first two months of 2019, according to the state’s employment security office.

Boeing Co. hasn’t laid off staff after halting production of its 737 MAX aircraft, instead redeploying workers to other programs, although suppliers have cut jobs. The aerospace giant said Wednesday that it would freeze hiring and nonessential travel, and place new limits on overtime. But production hadn’t been affected by three workers in its Puget Sound region plants testing positive for the virus.

Sandra Sucher, a professor of management at Harvard Business School, sees the potential for temporary furloughing of employees, rather than dismissing them permanently. That would help maintain employee morale and ensure companies have a pool of experienced workers when demand accelerates.

Avoiding layoffs, she added, will take “a lot of guts.”

—Doug Cameron, Rachel Feintzeig and Alison Sider contributed to this article.