Employee Ownership, Private Equity, and Job Creation

Both private equity and ESOPs often use equity to change ownership patterns, often with the goal of creating more efficient companies. Recent research published by the National Bureau of Economic Research (NBER) suggests that the impact of private equity on job creation, however, is markedly different from ESOPs.

In "Private Equity and Employment" (NBER Working Paper No. 17399, September 2011), Steven J. Davis, John C. Haltiwanger, Ron S. Jarmin, Josh Lerner, Javier Miranda, all of whom are professors at various universities, find that "relative to controls, employment at target establishments declines 3 percent over two years post buyout and 6 percent over five years. The job losses are concentrated among public-to-private buyouts, and transactions involving firms in the service and retail sectors." They also find that when private equity firms take over nonpublic companies, they produce significant job gains, but that is almost entirely due to additional acquisitions these firms make.

By contrast, research looking at ESOPs in both the 1980s and 1990s, first done by the NCEO and later by Joseph Blasi and Douglas Kruse of Rutgers, found that adoption of an ESOP increases employment by 2.5% per year relative to what would have been expected for these companies when industry effects are controlled for over the period. Because it was very rare at that time for ESOP companies to acquire other companies, virtually all this added growth was from newly created jobs.