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Identifying Spillovers in the Labour Market

Final Report Summary - SPILL (Identifying Spillovers in the Labour Market)

Firms often cluster together to enjoy productivity advantages from being close to each other. The goal of this project is to provide novel evidence on the existence and sources of such agglomeration effects.

In the first part of the project, we investigate for the first time in the literature whether, because of agglomeration effects, mass layoffs in one flagship plant create a domino effect on the region as a whole, thereby multiplying job losses. Such spillover effects provide the main rationale behind government bailouts of firms on the verge of bankruptcy. Our findings highlight sizable and persistent negative spillover effects on the regional economy: regions, and especially firms producing in the same sector as the layoff plant, lose altogether many more jobs than in the initial layoff. In contrast, employment effects on workers employed in the region are considerably smaller, and concentrated among older workers. Younger workers respond to the mass layoff by moving away from, or avoiding the region hit by the mass layoff. Our findings imply that while government bailouts may indeed prevent the economic decline of a region, they also distort the efficient allocation of workers to regions.

In the second part of the project, we focus on one particular source of the agglomeration effects uncovered in the first part of the project: knowledge spillovers. Whereas most of the existing literature investigates knowledge spillovers at the city or state level, we investigate knowledge spillovers at the level of the firm where, through face-to-face interactions, they are likely to originate. We go beyond the existing literature and investigate peer effects in the workplace for a representative set of workers, firms, and sectors of a large local labor market over two decades. Our findings highlight that the presence of high-performing co-workers can improve an individual’s earnings: in low-skilled occupations, an increase of 10% in the average performance of co-workers raises a worker’s wage by almost one per cent.