Researchers have long studied the costs to workers of major shocks to businesses like plant closures, new
regulations, or international trade. Less understood, however, is how one common and frequent shock plays out in the
lives of thousands of workers each year: The several dozen bankruptcies of publicly traded corporations that happen
annually in the United States.1
In a forthcoming article in the Journal of Finance co-authored with John R. Graham of Duke University, Si Li
of Wilfrid Laurier University, and Jiaping Qiu of McMaster University, we quantify a significant, long-term decline
in worker earnings that results from bankruptcy. Further, while some workers demand and receive higher wages before
bankruptcy, this “wage premium” isn’t always large enough to offset future losses for workers,
especially for those with more limited alternative job prospects.
As the first study that uses microdata on U.S. bankruptcies and affected workers to quantify these outcomes, we hope
to shed light on how bankruptcies can affect both workers and corporate decision-making.
When companies go bankrupt, employees see short- and long-term earnings losses
To understand how bankruptcies affect a company’s employees, we built a dataset of 130 bankruptcy filings by
U.S. public companies from 1992 to 2005 and followed, for up to six years, approximately 234,000 workers who were
employed by the bankrupt companies one year before bankruptcy.
Our findings suggest that the average employee sees a 13% drop in earnings the year the company files for bankruptcy.
The cumulative lost earnings over the next six years, which take into account state unemployment insurance benefits
employees receive, amount to 87% of what similar workers make annually at similar companies that did not declare