Spillover Effects of Mass Layoffs

Governments are often willing to subsidise or even bail out firms on the verge of bankruptcy. The main economic rationale behind these interventions is that a plant closure or bankruptcy would, through agglomeration effects, not only harm workers in the particular plant, but create a domino effect on other plants and workers in the region, thereby multiplying job losses. In the absence of such spillover effects on the regional economy, it is not obvious how to justify the use of taxpayer's money for subsidizing these companies on economic efficiency grounds. The goal of this project is to trace such spillover effects in the context of the German labour market.
Using data from the social security records of workers and their employers, we use the plant identifier to identify plant closures and mass layoffs. Our empirical strategy then combines a difference-in-difference approach with an event-study approach. We will first match for each treatment district a “control” district that in years prior to the mass job destruction was similar to the treatment district in terms of the demographic structure, industry structure, population density, as well as wages and unemployment, but that was not hit by a shock. To identify the effect of a mass job destruction on wages, employment and workers in the region, we then compare outcomes (at the local or individual level) in treatment and control districts in the years after the mass job destruction took place.
Our analysis seeks to answer the following five questions: (1) Does massive job destruction trigger additional job losses in the local labour market; and if so, in which sectors? (2) Does massive job destruction lead to higher unemployment and lower wages in the local economy? (3) Does it lower employment probabilities of workers in the same region who were not directly affected by the mass layoff but employed or looking for a job at the time of the mass layoff? (4) What happens to productivity in firms that are located in the region experiencing the mass layoff? And (5) how is the innovative capacity of a region affected and which regions are most vulnerable to lose their competitive edge as a consequence of a mass layoff?
The proposed research will make three important contributions. First, our findings add to the literature on displacement effects by studying potential negative spillover effects of displacements on other workers and firms in the region. If so, the social costs of displacement may be substantially larger than the private costs of displacement suggest. Second, our research project provides novel evidence on the existence, magnitude, and reasons behind agglomeration effects. As such, our proposed research contributes to long-standing questions such as: why do cities and industrial clusters exist? And can mass layoffs lead to a long-term decline of a region and its innovative capacity? Third, our findings have important policy implications. In particular, by contrasting spillover effects at the local labour market level with those at the individual level, our research will provide novel evidence whether state subsidies to particular firms can be justified not only from the viewpoint of the affected region, but also from the viewpoint of the economy as a whole.

Prof. Christina Gathmann, PhD (University of Luxembourg)
Prof. Dr. Uta Schönberg (University College London)

Ines Helm (LMU Munich)
Verena Lauber (Federal Ministry for Economic Affairs and Energy)