Does private equity kill jobs? Four conclusions from the book, “Private Equity at Work” by economists Elieen Appelbaum and Rosemary Batt.
Private equity owners cut more jobs than other companies, but the net effect is minimal. One paper cited, led by university of Chicago economist Steven Davis and reviewing 3,200 firms acquired between 1980 and 2005, found that buyouts lead to more job creation and destruction than companies that were not bought by private equity investors. The destruction arises from firing workers at existing establishments (such as stores or plants), while the creation comes from PE-owned companies investing in new facilities. On balance, employment within two years of the buyout shrinks at PE-owned firms relative to the control group, but the difference is less than 1%.
- Executives fare worse in terms of job retention. One study found that 39% of CEOs were replaced in the first hundred days of a buyout, and 69% were replaced at some point during PE ownership. “When private equity takes over a company, they put their people on the board of directors, draw up a 100-day plan and say to the managers, “If you can meet our targets, we’ll make you richer than you thought you could ever be, and if you don’t, you’ll be out of a job,’” said Appelbaum on a recent conference call about the book.
- For rank-and-file workers, wages fall. More research from Davis and his co-authors indicates that wages dip in the two years after private-equity buyouts (though the results vary by industry) even though productivity rises. This suggests that financial gains from higher productivity are being converted into returns for owners rather than salary bumps for employees.
Private-equity owners are no more hostile to labor unions than executives of public companies. “While some PE firms market themselves as union-friendly, others are hostile, and still others are agnostic,” the authors write. “Their range of attitudes does not seem to differ substantially from those of U.S. employers more generally.”
Original post: The Wall Street Journal.