Project Details
Projekt
Spillover Effects of Mass Layoffs
Subject Area
Economic Policy, Applied Economics
Term
from 2014 to 2019
Project identifier
Deutsche Forschungsgemeinschaft (DFG) - Project number 256809103
Governments often subsidise or even bail out firms on the verge of bankruptcy. For example, in 2008 and 2009 both the Bush and the Obama administration provided in total over US$50 billion to General Motors and Chrysler to prevent the shut-down of plants. 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, it is difficult to justify the use of taxpayer's money for subsidies 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, 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, wages and unemployment, but that was not hit by a shock. To identify the effect of mass job destruction on wages, employment and workers in the region, we then compare outcomes in treatment and control districts in the years after the mass job destruction. Our analysis seeks to answer 5 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? 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? Our findings contribute to the literature on displacement effects by studying potential negative spillover effects 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. Our research further provides novel evidence on the existence and magnitude of agglomeration effects. As such, our proposed research contributes to the long-standing question why cities and industrial clusters exist. Finally, our findings have important policy implications. 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.
DFG Programme
Priority Programmes
Subproject of
SPP 1764:
The German Labour Market in a Globalised World: Challenges through Trade, Technology and Demographics
International Connection
United Kingdom
