M&As, Employee Costs, and Labor Reallocation
Mergers and acquisitions reallocate control over the factors of production and are typically followed by extensive restructuring aimed at raising efficiency. A long-standing question is whether those efficiency gains come partly at the expense of employees. In my article, forthcoming in the Journal of Finance, I study the labor market consequences of mergers for the employees of target firms, and I find that mergers impose substantial, persistent, and unevenly distributed costs on workers. These costs arise primarily from displacement and reallocation across firms, rather than from lower wages for those who remain.
To study this, I follow individual workers over time and across employers. I combine information on the public and private firms involved in merger activity in Brazil between 2004 and 2012 with a comprehensive administrative data set that links every formally employed worker in the country to their employer and records the start and end date of each contract, the reason each contract ended, occupation, wages, and demographic characteristics. This allows me to trace the earnings and employment trajectories of every incumbent worker for several years before and after a merger, comparing them to those of workers at similar firms that were never acquired.
Workers at acquired firms experience a decline in annual earnings of roughly 6% relative to comparable employees elsewhere. The decline appears at the time of the merger and does not reverse over the subsequent five years. The composition of the loss shifts over time. In the short run it reflects reduced employment, as displaced workers experience spells of nonemployment. In the longer run it reflects lower wages, as those workers are reemployed in lower-paying positions. Mergers are also accompanied by a pronounced increase in involuntary separations.
The central finding is that these losses are concentrated almost entirely among workers who are involuntarily displaced. Those who remain are essentially unaffected. Those who leave voluntarily fare somewhat better, consistent with their moving to positions they prefer. Only involuntarily displaced workers bear the costs, and these are large and persistent. Their earnings fall by more than 10% and do not recover.
The costs are also borne unevenly across groups of workers. Higher-skilled employees and those in professional and technical occupations – who tend to have stronger outside options – are largely unaffected. The losses are concentrated instead among lower-skilled, blue-collar, and clerical employees. Managers experience the steepest decline of any group, and more than half of those displaced are subsequently reemployed in non-managerial positions, consistent with the market for corporate control operating as a governance mechanism that disciplines and replaces entrenched or underperforming management. Older workers also bear larger losses than younger ones, consistent with mergers acting as a vehicle to roll back seniority-based pay that had risen above their current productivity.
Observing where displaced workers are reemployed reveals why displacement is so costly. Comparable workers are paid systematically more at some firms than at others, so that part of a worker’s pay reflects a premium attached to the employer rather than to the individual. Displaced employees transition to firms that pay a lower premium, and the decline is largest for those leaving the highest-paying firms. Much of the long-run wage loss, in other words, is not because these workers have become less productive, it is because they no longer work for a high-paying employer. Part of a worker’s productivity, which is reflected in their pay, is specific to the pairing with their employer, so displacement destroys it and adds to the wage decline. Beyond this, displaced workers tend to move to smaller firms, to less desirable firms, and frequently to a different industry, where their accumulated experience is less well compensated. They are not exchanging lower pay for better nonwage amenities; they are reallocating to genuinely inferior employers.
These losses do not appear to stem from mergers concentrating employer power. I find little evidence that rising concentration in local labor markets, which would allow employers to suppress wages, is the primary force behind the earnings declines. Firms that pay their workers unusually well, however, are significantly more likely to be acquired in the first place. Taken together, this suggests that one motivation behind at least some transactions is to extract these wage premiums by displacing workers who were paid more than they would earn elsewhere.
These findings have implications for both the distributional effects of mergers and the way antitrust authorities review them. The evidence that displacement and costly reallocation, rather than market concentration, drive the earnings losses is directly relevant to the ongoing debate over the role of labor markets in merger policy. It may also help explain why antitakeover protections, particularly at the state level, emerged in the first place. And it underscores the value of identifying the groups of workers most exposed to merger-driven displacement, so that policy can help reintegrate them into the labor force.
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