NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Job Applications to Distressed Firms

The volume of applicants attracted to open job postings is negatively related to firmsÂ’ financial health.

Average employment within a company decreases by 27 percent in the two years surrounding a bond default and by 50 percent or more around a bankruptcy filing. Such job losses can be extremely costly for laid off workers who may face limited opportunities to find new employment, lower average wages at a new job, and possible psychological costs. These losses are believed to be greatest for workers with firm-specific skills. Given the costs, workers are likely to avoid distressed firms, making it difficult for these firms to recruit new talent, particularly for positions that require firm-specific investments.

In Boarding a Sinking Ship? An Investigation of Job Applications to Distressed Firms (NBER Working Paper No. 18208), authors Jennifer Brown and David Matsa use data from a large online job search platform to estimate the impact of corporate distress on firms' ability to attract job applicants. They find that job seekers' perceptions of firms' financial health are positively related to firms' actual status. They also find that the volume and quality of applicants attracted to open job postings is negatively related to firms' financial health.

The authors find no evidence that the decline in applications results from shifts in labor demand; the results hold for same-job analysis, and advertised salaries, if anything, increase. Applications decrease most among workers with less protection from state unemployment insurance and among workers facing greater upfront costs because they must relocate from out of the state.

Although it is impossible to quantify the impact of these effects on firm profitability, one likely implication is that distress reinforces distress: a struggling firm may be unable to retain and attract workers who could contribute to its recovery. Distress reduces firms' access to the national labor market and makes it particularly challenging to recruit for jobs with demanding educational requirements.

More broadly, the results of this study imply that labor market frictions are an important consideration for corporate decisions related to financial and operational matters, innovation, and growth strategies. The labor-related costs estimated here provide firms with a strong incentive to avoid distress.

Of course, firms can abate these costs in any number of ways. Most directly, the firm can reduce leverage and choose more conservative financial policies. Firms also can reduce the probability of distress by lowering operating leverage or taking on less risky projects, or can mitigate costs by redesigning job tasks to require fewer firm-specific skills.

--Lester Picker

The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.
 
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