In new research, Sabien Dobbelaere, Grace McCormack, Daniel Prinz, and Sándor Sóvágó find that mergers negatively impact labor market outcomes. Mergers result in job losses, and the earnings of workers who lose their jobs don’t recover for several years on average. The authors find these negative consequences are more likely attributable to the restructuring of labor forces than subsequent firm market power.
Market concentration has increased over recent decades in many industries in the United States. Increased product market concentration can hurt consumers via higher prices, while increased labor market concentration can lower wages for workers. At the same time, firms often argue that mergers can increase efficiency and allow them to deliver cheaper products, increasing consumer welfare. Part of this increased efficiency may come from more efficient organization of their workforces. How these effects play out is ultimately an empirical question with important implications for both competition and labor market policies.
In a recent paper, we examine the impact of firm takeovers on their employees’ labor market outcomes using comprehensive information on all firm takeovers in the Netherlands from 2011-2015 combined with detailed administrative data. We find that the workers of the firms that are taken over are negatively impacted: some of them lose their jobs and their earnings don’t recover for several years. However, our analysis suggests that these negative consequences are more likely to be driven by the restructuring of the labor forces of these firms than by increases in market power.
Workers lose jobs and income after takeovers
In our analysis, we compare firms that participated in a takeover with firms that are similar on many dimensions but were not affected by takeovers. Our sample includes all takeovers (more than 1,000) that happened in the Netherlands between 2011 and 2015.
Figure 1
Figure 1 shows the change in the probability of being employed before and after a takeover, comparing the workers of affected and unaffected firms.
We first examine how employees of firms that are taken over are impacted. We consider retention at their original firm, overall employment, labor market earnings, and overall income, accounting for social insurance benefits, which are quite generous in the Netherlands. Relative to the employees of firms unaffected by takeovers, the employees of acquired firms are 6 percentage points (8.5%) more likely to leave their employer. Most of them find work elsewhere: overall employment falls by only 1%. However, despite most of them finding employment, they lose some of their income. In the four years after a takeover, the workers of affected firms make on average 1,070 euros less than what they made before the takeover (2.6%). The Netherlands has a generous social insurance system, and accounting for transfer payments they lose only 789 euros (1.9%). These effects are not only large in magnitude, but they are also persistent: even four years after the event, target workers on average have 2.8% lower labor market income and 2.3% lower total income.
Figure 2
Figure 2 shows the change in labor income before and after a takeover, comparing the workers of affected and unaffected firms.
Figure 3
Figure 3 shows the change in total income (labor income plus social insurance benefits) before and after a takeover, comparing the workers of affected and unaffected firms.
We also investigate to what extent the effects on labor income are the result of reductions in employment and changes in compensation conditional on being employed. We find that even for workers who remain employed, there is a substantial drop in labor income in the years after the takeover. This drop is not driven by lower wages but by reductions in the quantity of work: affected workers are less likely to have a job and if they do have a job, they work fewer hours on average.
Market power is unlikely to be driving job and income loss
Most academic and policy discussions on mergers, as well as the government’s regulatory activity concerning the same, have focused on their effects on product market competition. While companies participating in mergers often argue that they create efficiency-enhancing synergies which benefit consumers, there are also concerns that they actually drive prices up and benefit corporate shareholders. More recently, labor market concentration has also become a concern. A growing academic and policy literature considers labor market monopsony, the presence of a single employer in a labor market, a threat to workers, competitiveness, and overall welfare. There are also counterarguments: workers in monopsonistic labor markets may be compensated by lower housing prices or move to other labor markets. In the post-Covid work-from-home world, they may not need to physically move either.
It appears that for the takeovers examined in our paper, increasing labor market concentration and employer market power are unlikely to be the main explanation for the job and income loss experienced by affected workers. This is because most takeovers have negligible effects on labor market competition. Instead, we find suggestive evidence that firms restructure their workforce in a way that reduces the number of workers they employ. Workers who earned more than expected at the acquired employer, based on their skills, were more likely to be cut. At the same time, we find that workers with similar skill sets to workers at the acquiring firm also lost their jobs at higher rates.
Government should consider the impact of mergers on workers
The results of our paper suggest that while takeovers may increase efficiency and consumer welfare, they can impact workers negatively and not only in the short term. Policy makers may wish to consider these effects when they regulate mergers. Beyond regulation, with merger activity and labor market concentration increasing, social insurance and safety net policies can also be designed to accommodate workers who lose their jobs as a result of their firm being absorbed.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
