Consequences of Corporate Closures – the other way around

by Cecilia Magnergård on October 2, 2013

Characteristics affecting re-employment probability

– the power of thinking the other way around


Entering startupThinking intensively about one subject often makes you realise that you really do not know much about it at all, subsequently, it results in an eagerness to learn more about that subject.

As outlined in one previous blog-post the stories of success from knowledge intensive start-ups and growth companies made me think about the effects of corporate closures from another perspective. I came to consider the consequences of corporate closures and displacement of workers, and that in turn made me start to reflect upon the relationship between individual characteristics and the probability of becoming re-employed.

In Sweden most of the displaced workers return to employment in the same year as the displacement,that is, they have a shorter jobless duration than one year. Using the same data as outlined here it was found that men face about 3.6 % higher overall re-employment probability than women. However, women are about 6 % more likely to become re-employed in paid-employment than men, whereas men face an 88 % higher probability of becoming self-employed than women.

The effect of self-employment experience on the probability of re-entering self-employment is shown to be very strong. This suggests that the barriers to self-employment entry, such as complicated taxation regulations, might inhibit individuals that otherwise would have entered. By either simplifying the regulations and, or, at an early stage provide education on self- employment, the negative effect of not having experience as self-employed should be reduced.

As outlined in one of my previous blog-posts, it is also found 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. Consequently, individuals who, if they were not jobless, would not have become self-employed, now might consider self-employment as an escape from joblessness.

Entrepreneur-EconomyOnce again, it is here important to keep in mind that 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.

Long previous tenures, probably correlating with large amount of firm-specific human capital, are shown to have a negative effect on re-employment probabilities. This could imply that new employers value firm-specific human capital less than more general human capital. Although, as is argued by endogenous growth theory (Romer, 1986 & Lucas, 1988), the spill over effects of human capital occur as individuals with different experience and different knowledge interact.

Together this means, somewhat simplified, that the displaced workers with the largest amount of specific human capital to spill over to others, are the ones that are unwanted by the employers-to-be. When reflecting upon these one might conclude several possible underlying explanations for this. One possibility is that workers have problems expressing their qualities and skills learnt in previous employment in applications and interviews, and that employers are unaware of the benefits that could come with spill overs. Therefore, by focusing on individuals with long previous tenures and assisting those in how their acquired skills can be used in another setting might improve the mobility and matching rate of this set of workers.


So, thinking about highly knowledge intensive start-ups and growth companies made me think about it the other way around; what about the displacement of those workers employed in large incumbent companies that is forced to exit due to increasing competition from the small high-growth companies. The thought consequently led me to the preceding summarized results as well as the results in this article.

Reflecting upon issues from a totally different angle often gives rise to new interesting knowledge that in turn gives you the opportunity to challenge your self in terms of opinions, views and ideas upon different matters.

Subsequently, today I encourage you to think about what you just thought of, however, do that completely on the other way around!


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