This may be remembered as the Summer of the Pink Slip in Illinois, which already lags behind its Midwestern neighbors when it comes to job growth.
Thousands of layoffs across the Chicago area range from factory jobs at the Mondelez plant on Chicago’s Southwest Side to white-collar jobs at Walgreens’ Deerfield headquarters. The Mondelez layoffs reflect its efforts to cut costs by shifting positions to more efficient operations in Mexico, but most of the recent cuts have resulted from the elimination of redundant jobs following mergers.
It’s a boom year for mergers and acquisitions activity, commonly referred to as M&A, and the job cuts tend to benefit shareholders of the acquired companies. But the silver lining is harder to find for Illinois, which has been grappling with its own enormous fiscal problems. Some experts say mergers are adding to the churn of jobs, while the stigma of mass layoffs is fading from memory.
“There’s incentive to cut costs, and M&A is one vehicle to achieve that,” said David Matsa, associate professor of finance at Northwestern University’s Kellogg School of Management.
Many back-office operations like human resources, legal and IT tend to become redundant as major companies consolidate their workforces. Afterward, the remaining workers usually take on additional responsibilities.
And increasingly, Matsa said, companies seem to be willing to lay off large numbers of employees. “Even in good times, layoffs have become more routine,” he said.
Globally, mergers and acquisitions already amount to $3.05 trillion in 2015, according to data provided by Dealogic.
And it’s only August.
As a point of comparison, M&A reached $3.6 trillion last year, the most since 2007, the last big boom before the recession, when such deals cleared $4.6 trillion. If this year’s current pace continues, it would surpass that amount, though a Dealogic spokesman cautioned that there’s no guarantee the current pace of M&A will continue.
The trend is similar in Illinois, where M&A has totaled more than $180 billion thus far, the most since $196 billion was recorded in 2007, according to the Dealogic data.
As the market has risen in recent years, so has the pressure for companies to grow through acquisitions, said Harry Kraemer, professor of strategy at Kellogg.
“It all comes down to being able to justify the cost of acquisition,” said Kraemer, a former CEO of pharmaceutical company Baxter International.
In the interim, combinations of big companies have had a major impact on Chicago-area jobs.
Earlier this month, the recently merged Walgreens Boots Alliance confirmed that 270 non-retail workers would be laid off, representing about 6 percent of the company’s corporate workforce in the Chicago area. An additional 100 or so jobs will be cut nationally, said company spokesman Michael Polzin. In June, 700 corporate jobs were eliminated in the United Kingdom.
Collectively, the layoffs are part of the plan to cut $1.5 billion in costs by Aug. 31, 2017, Polzin said.
And there’s Kraft Heinz, which earlier this month slashed 700 jobs from its north suburban Northfield offices, part of a plan to reduce 2,500 workers in the U.S. and Canada. In July, H.J. Heinz completed its purchase of Kraft Foods Group, forming Kraft Heinz, now the third-largest food and beverage company in the U.S. and the fifth-largest worldwide.
The stock market usually cheers such news.
Heitor Almeida, finance professor at the University of Illinois at Urbana-Champaign, said the prevailing long-term view is that post-consolidation top executives will grow the business and in the process create more jobs. The long-term economic impact may end up being positive, Almeida said.
The big question hanging over Illinois is whether those future jobs will be in this state. The days when companies were deeply rooted in their communities have mostly faded.
Meanwhile, uncertainties over unfunded pensions have cast a pall over the corporate investment climate in the state, said William Testa, vice president and director of regional research for the Federal Reserve Bank of Chicago.
“We need to right the ship,” Testa said. “I think we’re at a point of more concern than we were before.”
In terms of long-term trends, jobs are growing in Illinois, but at a slower rate than in other Midwestern states, he said. Michigan and Indiana, both strong auto industry states, have been propping up the region, while declines in machinery and agriculture have hampered Illinois.
Adding to the decline in machinery, Caterpillar announced 300 job cuts in the Peoria area earlier this week, out of 475 total job cuts. And John Deere has laid off 910 employees at plants in Illinois and Iowa this year, on top of 1,000 workers it let go across the Midwest last year.
“Basically, Illinois appears to have the worst performance with regards to job growth of any state in the Midwest,” said William Strauss, a senior economist with the Federal Reserve Bank of Chicago.
When it comes to both unemployment rate and employment growth rate, Illinois lags behind Indiana, Iowa, Wisconsin and Michigan, according to July data from the Bureau of Labor Statistics.
A recent analysis by the Pew Charitable Trust showed Illinois compared poorly against most other Midwestern states in job growth since the recession.
Since December 2009, the economic low point for Illinois, employment has grown 5.9 percent, according to the analysis, below the average of 8 percent for all 50 states and the District of Columbia.
“What we hear from contacts is they’re concerned about the future directions of taxes,” Strauss said. “When you look at the challenges of the state’s fiscal position, you have some concerns about what the future holds.”
The state’s corporate income tax rate actually decreased this year, from 7 percent to 5.25 percent, because of a built-in partial rollback of a 2011 tax hike. The 2.5 percent personal property replacement tax on corporations, which generates money for local governments, didn’t change.
But both Chicago and the state face massive budget deficits and growing unfunded pension liabilities, with no easy solutions immediately in sight. Recent efforts to reduce pension benefits for both city and state workers were struck down by judges who deemed them unconstitutional, raising the question of where the money will come from, if not taxes.
State and local taxes aren’t usually a primary factor in whether companies expand or contract, Testa said. But businesses investing in Illinois need to know there’s stability in government.
For years, Illinois has faced head winds that have nothing to do with the state’s pension problems, said Joseph Persky, an economics professor at the University of Illinois at Chicago. Since 1980, Chicago has lost nearly as many manufacturing jobs as Detroit, Cleveland and Pittsburgh combined.
Illinois was also the only state in the Midwest to not post manufacturing job gains in July year-over-year data from the Bureau of Labor Statistics.
Losing manufacturing jobs at Mondelez, and corporate jobs at Walgreens and Kraft Heinz, also has a multiplier effect, Persky said.
“For each job, you lose about another job,” he said.
That’s because, in both cases, the jobs bring in dollars from outside the Chicago area, much of which are spent on goods and services produced here, Persky said. And after the layoffs, that economic benefit may go elsewhere.
Then there are the views of Kraemer, a self-proclaimed optimist.
The recent job cuts may not be as grim as their numbers might suggest, Kraemer said, pointing to the low national unemployment rate, at 5.3 percent, as one piece of evidence that people are able to move in and out of jobs with relative ease. (Kraemer also acknowledged that number doesn’t reflect people who have given up on the job search.)
Still, as someone who has had to lay off many people in the course of his career, Kraemer said he understands the human impact. Recalling his own experiences, Kraemer said it was painful whether it was five or 500 people affected.
Before he stepped down from Baxter’s top job in 2004, he set into motion a restructuring plan that involved cutting 3,200 jobs. Those experiences also made him more prudent about hiring new people, he said.
“It’s unfortunate for our city,” Kraemer said of the layoffs. “One person gets laid off, it affects an entire family.”
One of Illinois’ historic challenges has been losing bright graduates of business schools to coastal markets with more investment in tech startup companies, he said. Chicago’s been playing catch-up on that front, he said, with the 1871 tech hub as one example of progress.
“We’re starting late,” Kraemer said. “But at least now we’re getting started.”
Twitter @GregTrotterTrib
