NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Private Equity and Employment

Private equity buyouts catalyze the creative destruction process as measured by both gross job flows and the purchase-and-sale of business establishments.

Do private equity transactions result in job losses or create new employment opportunities? In Private Equity and Employment (NBER Working Paper No. 17399), authors Steven Davis, John Haltiwanger, Ron Jarmin, Josh Lerner, and Javier Miranda analyze data from the U.S. Census Bureau's Longitudinal Business Database for the period 1980 to 2005. They track U.S. private equity transactions at 3,200 target firms and their 150,000 establishments -- that is, specific factories, offices, retail outlets, and other distinct physical locations where business takes place -- before and after acquisition, comparing outcomes at target firms to outcomes at "controls" that are similar in terms of industry, size, age, and prior growth.

The authors find that relative to a control group, employment at target establishments declines 3 percent over the two years following a buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts and among transactions involving firms in the service and retail sectors: the largest employment losses occur at firms engaged in retail trade.

In contrast, independently owned firms exhibit large employment gains relative to the controls in the wake of buyouts, mainly because they undertake more acquisitions. There are more private equity buyouts of independent firms than public-to-private transactions, and they account for a larger share of jobs.

While private equity buyouts accelerate job losses at target firms relative to controls, they also lead to the more rapid creation of new job positions, particularly in the form of new jobs at new establishments. In fact, the sum of gross job losses and gross job gains at target firms exceeds that of the controls by 13.5 percentage points over the two years following a buyout. About 43 percent of the extra job reallocation reflects a more rapid pace of employment adjustments; the rest reflects acquisitions and divestitures. Overall, net relative job losses at target firms are less than 1 percent of initial employment. These findings provide evidence that private equity buyouts catalyze the creative destruction process as measured by both gross job flows and the purchase-and-sale of business establishments.

--Lester Picker

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