Corporate Reorganization as Labor Insurance in Bankruptcy

Abstract

We examine the role of corporate reorganization as a source of labor insurance in bankruptcy using a random judge design and data from Portugal. Reorganized firms go through extensive labor reallocation and only keep about 20% of the workforce five years after reorganization. However, the corporate reorganization process has a positive and persistent effect on the quality of job contracts. In the short term (first year), workers are more likely to have job contracts. In the longer term (subsequent five years), workers earn more and are less likely to transition to less skill intensive occupations. Occupation fixed effects associated with earnings account for 46% of the earnings differential. Reorganization provides labor insurance to workers who move to new employers. Workers are less likely to be laid off and are more likely to quit and to find high-paying jobs in new employers.