At the limit, you would just reach a no hiring, no firing steady-state with a minimally functioning economy.

The only activity would be new companies hiring until they were overwhelmed by dead weight and companies going bust. (Wouldn't that be a little like firing everyone?) Strange and ponderous unintended consequences lie here!

Tenant-rights laws work the same way. The harder it is to evict tenants, the harder it is to get an apartment in the first place.

You will eventually have people who choose to produce less work than their benefits cost, much less salary.

[long grisly example of a firing deleted. short version, guy joined company, got extraordinairly expensive medical work taken care of, took the telecommuter version of "in cube retirement" until we fired him so he could take unemployment while ramping back up his previous independent contracting customers. Left us to pay back his probably fictitious hours billed to customers, health care costs, and unemployment insurance. See, the short version is even long and grisly.]

Also, the distinction doesn't always have to be between management and workers. I would worry about the forward-looking health of the company if that dichotomy became a topic of conversation anywhere within. Employees are not stupid, and will realize when something besides the best future prospects of the company are motivating the cuts being made. Odds are there is a comparable amount of potential pruning to be done in the management ranks -- some people I've have read have argued even more potential. Not saying that is what is happening here, but it was just a thought that popped into my head while reading yours.

On the other hand, there is the perspective that, if cuts aren't made, the spirit of "we're in this together" doesn't matter so much anymore, because there is no more "this". It can be soul-crushing, but not as soul-crushing as shutting the whole company down instead.

Or you can do what my old company did (but to be fair they didn't have much of a choice it seems) and just ask all employees to cut their salary in half or quit (glad I quit a few month before that....)

Or, you can just decide that after all living in a country were firing is not too difficult provides more benefits than problems and that being fired is not much more damaging psychologically than being pressured to quit because they can't fire you.

Why bother firing anyone when, instead, you can simply reduce their compensation?

Short answer: Cutting compensation is feared as even worse for morale than firing.

http://www.nber.org/~rosenbla/econ110-04/lecture/stickywages... [pdf]

Mr Bewley’s theory has some interesting implications. Pay cuts are more likely at firms whose demand for labour is price-sensitive, such as those in highly competitive industries. Since many markets are becoming more competitive, wages may also be getting more flexible—and unemployment may rise less in recessions. Wages are also likely to be less rigid in short-term jobs, where workers do not become attached to their firm.

...

Mr Bewley’s book is not the last word on sticky wages. Some of his findings are probably specific to the north-eastern United States in the early 1990s.

That's probably true.

His book consists of interviews with managers etc. It makes for an interesting read.