Failure to Jettison: The Cost of Labor on the Path to Recovery

Event Date: 6 February 2026

Speaker: Xiaoyun Yu, Advanced Institiute of Finance

Venue: CW404a, Cathedral Wing, Strathclyde Business School

Time: 2pm

Abstract:

We study how workforce composition and labor cost affect the recovery of financially distressed firms. Following an increase in worker displacement costs, distressed firms decelerate the layoff rate of less skilled employees and avoid mass layoffs. Their inability to offload low-quality labor leads to higher debt financing costs and reduced profitability, prompting more aggressive asset sales and wage cuts. Consequently, these firms experience prolonged recovery period, lower survival rates, greater likelihood of becoming zombie firms, and significant productivity setbacks. Delays in financial recovery exacerbate the departure of highly skilled workers and intensify resource entrenchment in distressed firms. At the regional level, a larger share of distressed firms crowds out resource allocation to healthy enterprises, elevates unemployment rates, suppresses new firm entry, and escalates population outflows. Our findings identify the mechanism by which labour cost rigidity impedes the resolution of financial distress and highlights its broader implications for local economy and labor market dynamics.

Published: 25 February 2026