Does Employee Downsizing Work? Evidence from Product Innovation at Manufacturing Plants

Workforce downsizing is an important management strategy that is assumed to allow firms to recover from business downturns. Using administrative data on the population of manufacturing plants and their products in Japan, we examined how plants that engage in layoffs reallocated their internal resources and whether they eventually increased their productivity or secured innovative gains. Accounting for staggered timings of layoff events, we found that such plants successfully reduced their production levels by reducing both capital and labor inputs. However, even years after the layoff announcement, those plants failed to outperform control plants in terms of introducing new products or increasing productivity. These results were accompanied by a disproportionate decline in the proportion of young workers and lower compensation among senior workers.