Jobs and Plant-Closing Legislation: What to Expect

Barely a week goes by without news of another major corporate layoff. The dire tidings have prompted some in Congress and the administration to consider a new effort to put teeth into the Worker Adjustment and Retraining Notification Act (WARN) of 1988. The legislation, vetoed once by President Reagan and enacted into law without his signature on a second pass, requires companies with 100 or more workers to provide 60 days notice of permanent plant closings or mass layoffs.

In an early assessment of the legislation, the General Accounting Office (GAO) concluded that the law was falling short of its goals. GAO’s study, released in February 1993, was based on an 11-state review of employer practices in the wake of the law, a nationwide assessment of the timeliness and completeness of WARN notices, and an employers’ survey about the law’s effects on their workers and business. GAO found that about 30 percent of employers were now giving workers 60 days notice. That was a significant improvement over estimates from a 1987 study suggesting that only about 11 to 18 percent of employers were providing such notice. While everyone agrees that layoffs are painful, there is less agreement that strengthening the law will bring the benefits proponents claim.

The Plant-Closing Law

The major argument advanced for the legislation in 1988 was that workers would be in a better position to get new jobs if they had sufficient warning about losing their current ones. There were other arguments as well. With notification, government agencies could gear up to provide adjustment assistance. Individuals could begin their job searches while still employed, reducing transitional or frictional unemployment, and begin to save for lean times ahead. And prospective purchasers of the plant could view the facility while it was still fully operational.

Estimates of the number of workers displaced by plant closings or mass layoffs each year vary widely from the 100,000 figure provided by the Bureau of Labor Statistics’ (BLS) Mass Layoff Statistics program (discontinued in 1993) to GAO’s estimates of 650,000. Even if one accepts the GAO figure, the proportion of total unemployment related to plant closings is still modest. During the 1980s, 7 million people were typically unemployed at any given time. Current Population Survey data compiled by the Census Bureau suggest that perhaps 20 million Americans are unemployed at least temporarily in a typical year. Thus, it is unlikely that more than 5 percent of the unemployed lose their jobs because of plant closings. Workers displaced after plant closings, however, are often unemployed for considerable periods, so the impact of plant closing may be greater than indicated by these estimates.

But even if the estimates are low, expanding notification provisions could actually harm employment prospects for other workers by raising the costs associated with employing them. Advance notice of layoffs gives competitors information that may erode the retrenching firm’s market share. Nearly 20 percent of employers responding to the recent GAO survey concluded that advance notice costs the firm sales. Some 36 of 240 employers responding to the survey indicated that worker productivity “decreased greatly” after WARN notices were issued, and 54 indicated that productivity “decreased somewhat.” Only 12 indicated that productivity increased. Nearly 20 percent of firms reported that managers quit after WARN notices were issued—managers who were not scheduled to be laid off or who would not have quit in the absence of WARN’s provisions.

A firm operating in the unstable employment environment typical of much of manufacturing today needs flexibility to determine how to meet contingency expenses associated with shutdown costs should they arise. WARN could limit its options. Plant-notification legislation thus increases hidden if not explicit labor costs.

And like other things, labor services are subject to the law of demand: if labor becomes more expensive, fewer workers will be hired. This principle has been amply demonstrated historically. We have seen a striking correlation between the adjusted real wage (wages adjusted for price and productivity changes) and unemployment. Put differently, if labor costs rise as a percentage of sales, businesses start reducing those costs; therefore, the higher the adjusted real wage, the higher the unemployment rate. To the extent that plant-closing notification laws raise labor costs, they should raise, not lower, unemployment rates. The one exception would be if the higher notification costs were offset by lower money wages. But generally the cost burden of WARN and similar legislation is transferred from employers to workers in much the same way that soaring health insurance costs have canceled out wage increases for some workers.

Some BLS unemployment data support the view that WARN has actually increased unemployment. The BLS maintains data stating the reasons individuals give for becoming unemployed. Statistical analysis of data on both a monthly and annual basis since 1980 reveals that the number of unemployed classified as job losers actually increased significantly after WARN—even after correcting for the effects of the business cycle on that statistic. This holds even if the analysis is confined to individuals who have lost their jobs and have no prospect of reemployment at their previous job, the category of unemployment applying in WARN cases.

Still, given the short period in which the legislation has been in effect, and the myriad factors that affect labor markets, it would not be prudent to claim too much based on the American experience with plant-closing legislation.

The European Experience

There is a growing consensus in Europe that stubborn unemployment and the slowdown in job creation there have been caused at least in part by heavily regulated and inflexible labor markets. Employment protection rules on the Continent make it virtually impossible to lay off workers. As part of a generous social welfare package, most European nations have adopted plant-closing notification laws of one form or another. In addition, the European Community (EC) adopted a directive in 1975 requiring that mass dismissals be preceded by consultations with workers’ representatives at least 30 days before termination. With this in mind, we looked at the experience of three major EC nations: Germany, Great Britain, and Italy. We compared their unemployment experiences with those of the United States when neither country had a plant-closing law and then when the European country had enacted a law but the United States had not.

In all three European countries, the unemployment rate rose significantly in the period after plant-closing notification requirements became effective. And in all three countries the unemployment rate rose relative to the U.S. rate before WARN was in effect. There are, of course, many mitigating factors in all four countries.

U. S. Comparisons

In the United States, nine states adopted plant-closing legislation prior to WARN. Most of these statutes only briefly predated the federal legislation. In Maine, however, plant-closing-notification legislation took effect in late 1971.

Comparing the years 1958-1971, before Maine’s legislation took effect, with the years 1972-1988, when Maine’s law was in effect but before the federal legislation was passed, yields inconclusive results. Maine’s annual unemployment rate rose in the latter period from 6.2 percent to slightly less than 7 percent. On the other hand, unemployment rose slightly less (about 0.2 percentage points) in Maine than in neighboring New Hampshire, which had no plant-closing notification law. It is unclear, then, what impact the law had, although the data hint that the impact was not very large.

Other more general studies likewise yield mixed results. Some find no relationship between advance notice and unemployment rates, while others find positive employment effects for some employees (usually blue-collar workers) but negative effects for others (usually white-collar workers). In sum, the results are mixed and hardly conclusive.

Virtually all of these other studies, however, were conducted before the passage of WARN and looked only at workers displaced from firms with voluntary advance notice. They tended to ignore the impact that advance-notice legislation might have had on workers who did not lose their jobs because of closings. If notification requirements raised labor costs in plant A in a year in which it had no mass layoffs, for example, the notification laws may have reduced employment growth in that plant—a fact not revealed by confining analysis to mass layoff situations.

Indeed, it may well be that plant-closing laws affect wages rather than unemployment. A firm facing the possibility of higher shutdown costs as a consequence of advance-notice legislation may compensate by paying workers less. The loss to worker welfare may show up not in unemployment lines but in slimmer paychecks. An additional concern is that provisions for wider notification could cause some employers to move toward a workforce composed in large part of temporary or contract workers who are not covered by WARN.

Conclusion

An expansion of WARN’s provisions clearly requires more study, particularly given the effects that the more restrictive legislation could have on overall employment in the United States. While about half of the employers the GAO surveyed reported that the legislation provided positive benefits for their workers, who found new jobs sooner—which is all to the good—nearly 4 in 10 reported productivity declines, and some reported losing managers necessary to their operation. Without further study, an expansion of WARN is ill advised at this time.