Employee Downsizing and Human Capital Accumulation
(Previous title) Does Employee Downsizing Work? Evidence from Product Innovation at Manufacturing Plants*

Employee downsizing plays a crucial role in firms' resource reallocation and worker relocation to new opportunities. Nonetheless, a notable concern for firms implementing employee downsizing is the potential loss of accumulated human capital. This study used administrative data from the manufacturing sector in Japan to explore how downsizing announcements impacted employees' age and tenure distribution. By accounting for the staggered timing of downsizing announcements, we obtained moderate evidence that plants sought to maximize the returns on their vested investments in firm-specific skills by reducing the proportion of long-tenured employees. However, our analyses also implied that the downsizing initiated the voluntary separation of young employees, leading to an older plant workforce. These findings were accompanied by no significant decline in plant productivity and innovation levels.

* We revised this discussion paper with the new title in November 2025. This paper was previously circulated under the title "Does Employee Downsizing Work? Evidence from Product Innovation at Manufacturing Plants."