Destruction and Reallocation of Skills Following Large Company Exit

Abstract

What happens to redundant skills and workers when a large company closes down in a region? The knowledge embodied in firms is lost when firms exit. However, the skills, competences and knowledge embodied in the displaced employees are suddenly released and can become channels of knowledge transfer for other firms that hire them. This process can be very disruptive. For instance, when a large, old and well-renowned company closes down displacing thousands of workers over a short period of time, then it may be a shock to the regional economy and lead to unemployment and skill destruction. The question then becomes: under which conditions are the redundant workers and their skills reallocated to productive use elsewhere in the regional economy and when do the workers find a job where their specific skills are less valuable to the new employer and the worker must start over acquiring new skills, that is, skill destruction. This study is based on the closure of four shipyards in Denmark from 1987-2000. The analysis is based on detailed longitudinal micro data from a matched employer-employee dataset that allow us to follow the mobility of the laid-off employees in great detail. The analysis shows that mobility of workers to related industries leads to less skill destruction. The presence of related industries in the region matters for the extent of skill reallocation and skill destruction. The voluntarily mobile displaced workers also experience less skill destruction, because they find a job that matches their current skills.

Keywords: Shipyards; company exit; regional economy; knowledge

JEL Classification: J63,R11