The Link between Human Capital, Mass Layoffs, and Firm Deaths

We focus on the correlation of firm closures with the human capital employed by those firms. Mass layoffs, characterized by large displacement events, are an important indicator that increases the probability of observing a closure. We characterize the distribution of human capital within the firm using a decomposition of the wage rate that measures the “general human capital” component. Our analysis can be summarized as follows. Single displacement events occur substantially more often in firms that disproportionately employ workers in the lowest quartile of the human capital distribution. Firm closures occur substantially more often in firms that disproportionately employ workers in the lowest quartile of the human capital distribution and disproportionately less often in firms that disproportionately employ workers in the highest quartile of this distribution. Once we condition the firm closure analysis on the displacement event, our analysis suggests that firms that disproportionately employ workers in the highest quartile of the skill distribution are less likely to close, even given a displacement event, than are other firms that experience displacement events. In this analysis, however, there does not seem to be an effect of disproportionately employing those in the lowest quartile–suggesting that the effect of employing workers who come disproportionately from the lowest part of the human capital distribution on firm closure works through increasing the probability of a displacement event.