Shrinkage is the process of becoming smaller, or the amount by which something becomes smaller. When you wash a wool sweater in hot water, you might discover shrinkage: the sweater comes out noticeably smaller than it went in. Wood experiences shrinkage as it dries, which is why carpenters need to account for it when building furniture or houses.

In business, shrinkage refers to the loss of inventory or products, usually through theft, damage, or error. A store manager tracking shrinkage might discover that merchandise is disappearing because shoplifters are stealing it, employees are accidentally breaking items, or the computer system is recording incorrect numbers. High shrinkage cuts into a store's profits because the store has paid for products it can no longer sell.

The word can also describe a decrease in size, amount, or value more generally. A company experiencing shrinkage might be losing customers or revenue. You might notice shrinkage in your savings account if you keep spending without adding new money. Scientists measure the shrinkage of glaciers to understand climate patterns. When something undergoes shrinkage, it contracts, diminishes, or reduces from its original size or amount.