Is there life after product quality failures? Evidence from employment decisions

Abstract

Prior literature has documented that product quality failures have negative impacts on the interest of stakeholders, such as consumers and shareholders. We extend this literature by investigating its potential effects on the interest of employees. Using a novel dataset that tracks the recall incidents of Chinese firms in an industry where product quality is crucial (i.e., the drug industry), our empirical results show that the effects on corporate employment decisions are twofold. On the one hand, we show that firms’ employment growth decreases after product recalls. The effect is more pronounced in non-state-owned firms, firms with higher labor costs, firms in regions with weaker labor protection, and during periods when local politicians lack promotion incentives. On the other hand, product recalls mainly induce firms to reduce the employment growth of low-grade employees, consistent with recalling firms relying on high-skilled labor to improve drug quality. Collectively, our study suggests that product quality failures could be a broader issue of corporate social responsibility (CSR) than being documented, and carries implications for policymakers concerning employment as well as product safety.