M&As, Employee Costs and Labor Reallocation

I study the earnings, employment, and reallocation effects of mergers on incumbent employees. Using detailed employer-employee administrative data linked with manually collected information on merger activity in Brazil, I find mergers are associated with large and persistent earnings declines for employees in target firms. These declines are entirely explained by employment losses from displacement in the short run and wage losses from reallocation in the long run. Losses of firm-specific rents account for a substantial part of wage losses with employees transitioning to lower-paying, lower-quality firms. The effects increase with the level of pre-merger firm-specific rents. Finally, I provide evidence that the effects are concentrated among high-rent and low-skilled employees. Taken together, my findings highlight the role of costly reallocations as the primary factor contributing to merger costs for employees, and point to wealth transfers from low-skilled and excessively paid employees as a potential motivation for mergers.