Consequences of corporate closures

by Cecilia Magnergård on September 18, 2013

Redundancy duration and business alteration 
Consequences of establishment closures in Sweden

Highly knowledge intensive start-ups and growth companies, such as Activio, Nodeone and most recently Algotrim; a company with its roots in the business incubator Minc who just last week was bought by the giant – Apple, are all examples of inspiring, smart and highly proficient companies.

Mutually they all, through acts of innovation and enthusiastic leadership, has reached great business success. They all have their individual specific little characteristic that has finally lead to their admiring accomplishments, and they are all inspiring fairy tales that are important to read and examine repeatedly and always.

These small stories of success made me however start thinking about the other way around. What about the individuals working in the already large incumbent companies that is forced to exit due to the increasing competition from these small high-growth companies, what about the displacement of those workers?

BankrupcyWorker displacements and business closures are part of a constantly on-going process in society; however, during the recent decades the frequency has increased. Some of the most recent large-scale business closures and/or downsizings in Sweden include Ericsson in Norrköping in 1999, Kockums in Malmö in 1998 and most recently Saab in Trollhättan and AstraZeneca in Södertälje.

In 2012, 7471 firms went bankrupt, corresponding to an increase by 7 per cent since the previous year. The same year, 26464 workers were affected by the bankruptcies, which is equivalent to an increase by 11 per cent compared to 2011 (Tillväxtanalys 2013).

In 2013, for the first time since the industrial revolution, emerging economies will produce the majority of the world’s goods and services. The recent financial crises, increased competition from low wage countries in combination with extensive technological progress can all serve as explanations for why displacement of workers seems to have become more frequent in the western societies over the past years. These facts made me curious to understand what really happens to employees that loose their employment through an establishment closure, and look at when, if ever, and under which circumstances they are re-employed.

kodak bye byePrevious literature, such as Acemoglu (1995), treating the subject came to find that duration of joblessness may in it self affect the time the displaced individuals remains out of employment as the intensity to look for a new job may change as the time of joblessness increase.

Theory of positive duration dependency helps to explain why job-search intensity may increase as time out of employment increase, and is suggested to be a result of decreased reservation wages. For example, as individuals stop receiving unemployment benefits the individual get a depression of income that in turn makes the reservation wage decline resulting in increased job-search intensity.

I figured that this may also help to explain why individuals, after a long period of joblessness, may chose to move in to practically any type of employment, change municipality of living, start to commute or become self- employed. However, once again I started to think about the other way around, I figured that negative duration dependency must have an effect as well?

A long duration of unemployment sends negative signals to the employers about the worker’s productivity and therefore, the duration of the unemployment, should be expected to negatively affect the probability of finding employment. For example, an individual’s search intensity could be decreased as the length of the unemployment spell increases, and as the length of the unemployment spell increases, the human capital declines.

The individual might thereby find re-employment prospects hopeless. These theories and additional literature upon industrial mobility, geographical mobility, endogenous growth and mobility into self-employment made me even more eager to see what really happens to individuals that loose their employment through an establishment closure. I wanted to see how long it takes for these set of individuals to get into employment again, and what they had to sacrifice in order to do so.

As not to drowse you with econometric details, I decided to use unique longitudinal matched employer-employee data incorporating all firms, establishments and their employees in Sweden between the years 1997-2008. All individuals between 25 and 55 years of age at the time of displacement that were displaced between 2000 and 2003 due to establishment closures were followed over a five-year period of time. It was finally time to get my questions answered.

chapter-11I found that an absolute majority of the workers that get displaced one given year also recovers within that same year. As the results show that most individuals are re-employed within the year of displacement the positive spill over effects from labour mobility could outcompete the negative effects from the closure and increased unemployment.

Correspondingly, the closure of the establishment could in itself be a part of the process of creative destruction such that the establishment was pushed out of business due to the entry of a new and more productive alternative. Something that in itself is positive, however this doesn’t count for all employees that work at establishments that are closed down. Facilitating labour mobility would, by this logic, increase the positive knowledge spill overs to firms and employers, and thereby increase the overall economic growth.

Furthermore I found that the longer the displaced workers are out of employment, the larger is the willingness to change industry of work and change municipality of living. In order to maximise the utility of the labour force including an increase in the displaced workers re-employment rate, I found that economies are required to ease the movement and commuting prospects for these workers.

Such a development obligates improvements of the infrastructure, which would increase the general mobility level as well as make it easier for the displaced worker to start to commute or move. If accomplishing improved infrastructure it could make it easier for the displaced workers to move with respect to improved travel possibilities such that visiting family and relatives still living in former area of residence would be facilitated.

Such improvement would reduce the cost of moving and commuting and thus decrease the reservation-wage for jobs in other regions. However, and here comes me thinking the other way around again, I figured it could be argued that assisting in constructing an environment in which the displaced workers do not have to move at all also would be a way to facilitate displaced workers re-employment rate.

Finally, I came to understand that the longer an individual stays jobless, the more likely he or she is to become self-employed. This suggests that the longer an individual is jobless, the reservation wage of self-employment decreases. Thus, individuals who, if they were not jobless, would not have become self-employed, now might consider self-employment as an escape from joblessness.

Here one must be careful though. If these necessity-driven new self-employed fail as entrepreneurs, the damage to the individual and to the society at large could be even larger than if the individual had remained jobless a little longer. Therefore, promoting self-employment entry to jobless displaced workers might be an effective means of reducing the post-displacement joblessness but might not necessarily be beneficial to the specific worker or to the society at large if the self-employed is unsuccessful.

Övergiven fabrik i MontenegroConsequently, I found that most individuals that get displaced one given year also recovers within that same year, many of the displaced workers start to commute or have to change municipality of living in order to reach employment again and a large part also has to move into self-employment in order to get working after displacement – results defined when starting to think about small high growth companies the other way around.

But as usual, thinking intensively about one subject only makes you realise that you really don’t know much about it at all, subsequently, it results in an eagerness to learn so much more about the subject. For example, in order to broaden the understanding of this investigating the relationship between individual characteristics of displaced workers and the probability of re-employment would probably be very fruitful.

About Cecilia Magnergård :

Analyst with deep knowledge in Economic Strategy, Innovation Management and Business Developmed combined with a profound interest in complex problem solving and the global financial markets. She has an BSc in economics and a Master of Science with a major in Engineering and Management specialised in Economics of Innovation and Growth from the Royal Institute of Technology.

{ 1 comment… read it below or add one }

Lennart Cragéus September 22, 2013 at 06:39

We are impressed and are looking forward to
see you and the result of your work in the future.
It must be succesfull !
Good luck

From Inger o Lennart

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