Firing and rehiring destroys morale. A perfectly stable and functional company can destroy itself by trying something like this. Employees will start to realize that no matter what they do they're getting shafted and their productivity will drop. Some will seek employment elsewhere, but those are often the ones you want to keep. You'll be stuck with mediocre and bad employees. When you try to fill in positions with new employees, they see a dysfunctional shop and start looking for the exit.
That greatly depends on overall economic conditions. In many places unemployment approaches 50% at which point wages become far more elastic.
PS: Talking about economics goes beyond software developers or illigal day labiors in the US. It includes peasants in the middle ages, factory workers in ‘Soviet Russia’ and even gally slaves on a Roman warship.
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