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Recessions and the Costs of Job Loss

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  • Steven J. Davis
  • Till Von Wachter

Abstract

We develop new evidence on the cumulative earnings losses associated with job displacement, drawing on longitudinal Social Security records for U.S. workers from 1974 to 2008. In present value terms, men lose an average of 1.4 years of re-displacement earnings if displaced in mass layoff events that occur when the national unemployment rate is below 6 percent. They lose a staggering 2.8 years of pre-displacement earnings if displaced when the unemployment rate exceeds 8 percent. These results reflect discounting at a 5% annual rate over 20 years after displacement. We also document large cyclical movements in the incidence of job loss and job displacement and present evidence on how worker anxieties about job loss, wage cuts and job opportunities respond to contemporaneous economic conditions. Finally, we confront leading models of unemployment fluctuations with evidence on the present value earnings losses associated with job displacement. The model of Mortensen and Pissarides (1994) extended to include search on the job generates present value losses less than one-fourth as large as observed losses. Moreover, present value losses in the model vary little with aggregate conditions at the time of displacement, unlike the pattern in the data.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 43 (2011)
Issue (Month): 2 (Fall) ()
Pages: 1-72

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Handle: RePEc:bin:bpeajo:v:43:y:2011:i:2011-02:p:1-72

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Keywords: job displacement; earnings; unemployment;

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References

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Recessions are costly
    by Economic Logician in Economic Logic on 2011-12-29 15:00:00
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Cited by:
  1. Neil Mehrotra & Dmitriy Sergeyev, 2013. "Sectoral Shocks, the Beveridge Curve and Monetary Policy," 2013 Meeting Papers 919, Society for Economic Dynamics.
  2. David Berger, 2012. "Countercyclical Restructuring and Jobless Recoveries," 2012 Meeting Papers 1179, Society for Economic Dynamics.
  3. Lehmann, Hartmut & Muravyev, Alexander & Razzolini, Tiziano & Zaiceva, Anzelika, 2013. "The wage and non-wage costs of displacement in boom times: Evidence from Russia," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1184-1201.
  4. David Neumark & Patrick Button, 2013. "Did Age Discrimination Protections Help Older Workers Weather the Great Recession?," NBER Working Papers 19216, National Bureau of Economic Research, Inc.
  5. Verónica Amarante & Rodrigo Arim & Andrés Dean, 2012. "The effects of being out of the labor market on subsequent wages: evidence for Uruguay," Documentos de Trabajo basados en Monografías (students working papers) 12-10, Instituto de Economía - IECON.
  6. Ge, Yuhao & Lehmann, Hartmut, 2013. "The Costs of Worker Displacement in Urban Labor Markets of China," IZA Discussion Papers 7327, Institute for the Study of Labor (IZA).
  7. Kristiina Huttunen & Jenni Kellokumpu, 2012. "The Effect of Job Displacement on Couples? Fertility Decisions," Working Papers 29, Government Institute for Economic Research Finland (VATT).
  8. Perihan Ozge Saygin & Andrea Weber & Michèle A. Weynandt, 2014. "Coworkers, Networks, and Job Search Outcomes," NRN working papers 2014-06, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.

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  1. Economic Logic blog

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