The impact of firm closure on workers' future labour market outcomes

Abstract

This paper examines the impact of job loss due to firm closure on workers' employment, earnings, and benefit receipt. It uses data from Statistics New Zealand's Linked Employer-Employee Data (LEED). The impact of job displacement was estimated by comparing the changes in labour market outcomes for workers who experienced a closure or restructuring, with the changes in outcomes for a control group of workers who were employed at firms that did not experience these events. The analysis allows the estimated impacts of displacement to vary according to the type of event experienced. It also assesses whether the effects of job displacement differ for workers with different personal and job characteristics, and whether there are identifiable impacts on people who worked at affected firms in the year prior to the closure or restructuring. The analysis found that job loss due to firm closure has persistent impacts on the sub-sample of workers who were most likely to have experienced a complete firm closure. The employment rate for these workers is 17 per cent lower one year after the firm closed than those for comparable workers at non-closing firms, and remain 12 per cent lower four years after the closure. Similarly, monthly earnings are 22 per cent lower one year after the closure and 16 per cent lower four years after the closure. The benefit receipt rate is 45 per cent higher one year after the closure, although this increase is from a very low base. The analysis reveals smaller but still significant negative impacts for workers whose firm event was classified as a partial closure. Displacement has relatively little impact, on average, on the outcomes of workers who were most likely to have experienced a firm restructuring. Employees at small and medium-sized establishments that closed experienced greater employment and earnings losses than those at closing firms with 50 or more employees. Employees with at least two years of job tenure also sustained larger losses than those with shorter tenure. Although overseas studies have found that mature workers in the 55 years and over age bracket tend to be harder hit by redundancy than prime-age workers, in this study the impacts on prime-aged and older employees were of a similar magnitude, while larger impacts were found for younger employees.