Creative Destruction? Mass Layoffs and Innovation Spillovers

• In Event: Innovation Under Pressure: Policies, Shocks, and Spillovers

Abstract

Mass layoffs are typically viewed as detrimental to regional economies. This is because these events are often tied to negative economic consequences such as increased unemployment, downward pressure on wages, and reduced consumer spending. However, mass layoffs may also act as bridges between otherwise disconnected innovation hubs by facilitating the flow of information and ideas as displaced workers move to new firms. Despite these potential, positive spillover effects of mass layoffs have received relatively little attention which could offer different perspectives to understanding the events, compared to their negative consequences.

 

This study addresses this research gap by examining the short- and long-term effects of mass layoffs on innovation of firms receiving displaced workers. As data, I use a novel micro-level dataset that links LinkedIn employment histories with patent records. The use of this dataset allows for a detailed view of pre- and post-layoff labor flows and innovation dynamics by tracking individual worker mobility, firm characteristics, and patent activity.

 

Descriptive statistics show that roughly two-thirds of displaced workers transition to small firms (fewer than 50 employees), while the remaining one-third move to larger firms. To evaluate the impact of these worker flows on innovation, I employ a difference-in-differences research design, comparing firms that absorbed displaced workers to similar firms located in metropolitan statistical areas (MSAs) unaffected by layoffs.

 

The results show that small firms absorbing displaced workers experience a short-term increase in innovation output. In contrast, large firms do not exhibit changes in innovation after hiring displaced workers. Although the positive innovation effects for small firms diminish over time, the benefits remain significant over the long-term (up to seven years) compared to firms in unaffected MSAs.

 

Further evidence suggests that these gains stem from several mechanisms: first, knowledge transfer from displaced workers who bring new skill sets and perspectives; second, the formation of new teams and project collaborations through displaced workers’ networks; and third, a greater diversity of human capital in receiving firms. Collectively, these channels appear to boost the innovative capacity of host organizations despite the overall disruptive nature of mass layoffs.

 

These findings suggest that while mass layoffs have little effect on large firms, they can generate positive spillover effects for small firms in both the short and long run. This highlights the potential for policy interventions—such as targeted support or incentives for small firms—to transform labor market disruptions into opportunities for innovation growth.

 

This paper will further examine the broader regional impact of mass layoffs on innovation, as well as their general equilibrium implications.

Author

• SOO YEON KIM, University of California, Merced
  Presenting Author