Abstract

Governments are often willing to subsidize or even bail out firms on the verge of bankruptcy. The main argument behind these governmental actions is that a plant closure or a mass layoff would not only affect the employment prospects of workers in these plants, but create a domino effect on other plants in the region, multiplying job losses. In this project, we directly investigate, for the first time in the literature, these spillover effects. Using an event-study approach that compares employment trends in local labor markets where a large firm laid off a substantial share of its workforce with those in similar local labor markets where no such event took place, we find strong evidence for local spillover effects: A mass layoff that directly affects about 3% of all workers in the local labor market leads to a reduction in employment in other firms in the local labor market by about 1.5 percentage points four years after the event. These effects are persistent over time, stronger in agglomerated areas than in rural areas and are to a large extent driven by employment reductions in close industries, suggesting that agglomeration externalities are driving these effects.
In future work, we are planing to investigate the "reverse experiment"--the spillovers of mass job creation.