The long-term effects of mass layoffs: do local economies (ever) recover?

Abstract

Abstract This article investigates the long-term reaction of local labor markets (LLMs) to a mass layoff in a manufacturing plant. We adopt a non-parametric generalization of the difference-in-differences estimator expressly developed for time-series cross-sectional data and a new comprehensive dataset. Our results suggest that, on average, a mass layoff abruptly decreases industry employment by 22%; this negative impact is persistent even 9 years later. The shock has a negative and statistically significant effect only on the same industry of the affected LLM, while the rest of the local economy is, at most, mildly negatively affected. These findings depend on the initial level of development and call for the policymakers’ intervention to design efficient employment policies aimed at reducing the long-lasting social costs of a mass layoff at least for the less developed and less dynamic local economies.