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

This paper 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 to gauge the long-run sectoral effects of this negative employment shock in Italy. We find that, on average, a mass layoff abruptly decreases industry employment by 22% and that this negative impact is persistent even eight 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 affected. These findings do not depend on the initial level of development and call for the policymakers’ intervention to design efficient employment policies aimed at reducing the social costs of a mass layoff at least for less dynamic economies.