Abstract

Structural transformation displaces workers, but estimates of the resulting earnings losses typically conflate three overlapping channels: an individual firm’s closure, the decline of an entire industry, and regional economic distress. To disentangle these effects, this paper exploits East Germany’s sudden transition from a centrally planned to a market economy. The Treuhandanstalt, the agency tasked with privatizing state-owned enterprises, liquidated firms unevenly across industries and independently of how hard districts were hit. For a workforce previously allocated by the central plan, these liquidations acted as quasi-random shocks that allow for comparisons among otherwise similar workers. By linking 2.8 million workers from the 1989 GDR workforce register to the ultimate fate of their employers, this study tracks the career trajectories of the 1.5 million workers aged 20 to 39 over 25 years. The results show that industry decline drove the largest earnings losses. Crucially, a surviving firm offered its workers no protection: in highly exposed industries, the earnings penalty of a firm’s liquidation vanished, as the industry’s decline lowered earnings for both groups about equally. Regional exposure lowered earnings only for workers whose own firms were liquidated and who were forced to search for new jobs. The losses from industry decline and liquidation persisted for over two decades. The findings suggest that policies mitigating structural decline must target all workers in exposed industries, rather than focusing solely on displaced individuals or specific regions.