Actually, it means that the firm's output falls, unless the laid-off workers were merely hired as "feather-bedding." If the firm's output does not fall with laying off workers, it means that the original decision to hire them was incorrect. Why would lots of firms make similar mistakes in hiring too many people? Inflation and low interest rates.
Yes. I’ve worked at a LOT of companies in my 55 years, partly because I spent 12 of them as a consultant/contractor. There is a LOT of deadwood in EVERY company. And the bigger the company, the more deadwood there is.
When you lay off in a non-union shop, it is not that hard to get rid of the dead wood first. That act alone is going to increase productivity, and sometimes markedly so. Also, unproductive companies that shut their doors are no longer in the equation.
As the economy cleans house, I expect productivity of those that STILL HAVE JOBS to go up significantly.
If you have increased demand and you can get rid of employees, it means you are still well within the so-called "learning curve" of the process that defines your business. The typical "learning curve" eventually "bottoms out" so you have to change your modularity to keep up with your competitors. That resets the learning curve.