Private Equity and Human Capital Risk

We study the impact of leveraged buyouts in Germany on employees' wages, employment, and their career paths, and contrast the modernization view with the breach-of-trust view. We match employee-level data of more than 139,000 LBO employees to a carefully selected control group in order to conduct difference-in-differences estimations. LBOs increase employment in the event year and the subsequent year, but reduce employment after three years. The short-term impact on wages is more positive than on employment, but the long-term impact is indistinguishable from zero. The short-term results suggest that employees temporarily benefit from compensation plans when restructuring measures involve layoffs. Employees with longer tenure in the firm, the industry and generally older employees all see their employment and wages decline more than employees with more general human capital. We conclude that LBOs in Germany foster modernization but do not transmit general trends of the labor market, such as skill-biased technological change or job polarization.