Working Papers

Private Equity and Employment

Executive Summary:

The employment impact of leveraged buyouts by private equity firms arouses intense concern and strongly held views. But is there truth to the claim that leveraged buyouts bring huge job losses? Steven J. Davis, John Haltiwanger, Ron Jarmin, Josh Lerner, and Javier Miranda examine employment responses to US private equity buyouts at a much more granular level than earlier research, exploiting a much larger sample of transactions, a more extensive set of controls, and a novel ability to track outcomes at firms and establishments (e.g., individual factories and offices). They also exploit the strengths of their data to explore new questions about private equity's role in the creative destruction process and its impact on restructuring activity inside target firms. Overall, they find that private equity buyouts catalyze the creative destruction process in the labor market as measured by gross job flows and the purchase and sale of business establishments, with only a modest net impact on employment. Key concepts include:

  • While private equity transactions dramatically increase the turnover of workers-both hiring and layoffs, acquisitions and divestitures-the net effect of the increased activity is modest.
  • Employment responses to private equity buyouts vary considerably across industries and by type of transaction.
  • The largest employment losses at targets relative to controls occur in public-to-private transactions. In contrast, in most other firms the effect is neutral or even positive.
  • Future research should investigate experiences outside the United States. While U.S. private equity outcomes are especially interesting because of the industry's large size and maturity, the impact of private equity might differ across environments depending on corporate governance, financial depth, legal institutions, and economic development.

HBS Faculty Member Josh Lerner

Josh Lerner

Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School.

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Author Abstract

Private equity critics claim that leveraged buyouts bring huge job losses. To investigate this claim, we construct and analyze a new dataset that covers US private equity transactions from 1980 to 2005. We track 3,200 target firms and their 150,000 establishments before and after acquisition, comparing outcomes to controls similar in terms of industry, size, age, and prior growth. Relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors. But target firms also create more new jobs at new establishments, and they acquire and divest establishments more rapidly. When we consider these additional adjustment margins, net relative job losses at target firms are less than 1 percent of initial employment. In contrast, the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years. In short, private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.

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