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Recessions and the Costs of Job Loss

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Author Info

  • 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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  1. Marcus Hagedorn & Iourii Manovskii, 2007. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," IEW - Working Papers 351, Institute for Empirical Research in Economics - University of Zurich.
  2. Mortensen, Dale T. & Nagypál, Éva, 2005. "More on Unemployment and Vacancy Fluctuations," IZA Discussion Papers 1765, Institute for the Study of Labor (IZA).
  3. Matthias S. Hertweck, 2010. "Endogenous On-the-job Search and Frictional Wage Dispersion," Working papers 2010/02, Faculty of Business and Economics - University of Basel.
  4. Melvin Stephens, 2004. "Job Loss Expectations, Realizations, and Household Consumption Behavior," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 253-269, February.
  5. Steven J. Davis & R. Jason Faberman & John Haltiwanger, 2006. "The Flow Approach to Labor Markets: New Data Sources and Micro-Macro Links," Journal of Economic Perspectives, American Economic Association, vol. 20(3), pages 3-26, Summer.
  6. Bruce D. Meyer & Wallace K. C. Mok & James X. Sullivan, 2009. "The Under-Reporting of Transfers in Household Surveys: Its Nature and Consequences," NBER Working Papers 15181, National Bureau of Economic Research, Inc.
  7. Burcu Eyigungor, 2008. "Specific capital and vintage effects on the dynamics of unemployment and vacancies," Working Papers 08-6, Federal Reserve Bank of Philadelphia.
  8. Robert E. Hall, 2010. "Comment on "Adjusted Estimates of Worker Flows and Job Openings in JOLTS"," NBER Chapters, in: Labor in the New Economy, pages 216-221 National Bureau of Economic Research, Inc.
  9. Costain, James S. & Reiter, Michael, 2008. "Business cycles, unemployment insurance, and the calibration of matching models," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1120-1155, April.
  10. Philip Oreopoulos & Marianne Page & Ann Huff Stevens, 2005. "The Intergenerational Effect of Worker Displacement," NBER Working Papers 11587, National Bureau of Economic Research, Inc.
  11. Kahn, Lisa B., 2010. "The long-term labor market consequences of graduating from college in a bad economy," Labour Economics, Elsevier, vol. 17(2), pages 303-316, April.
  12. Johannes F. Schmieder & Till von Wachter, 2010. "Does Wage Persistence Matter for Employment Fluctuations? Evidence from Displaced Workers," American Economic Journal: Applied Economics, American Economic Association, vol. 2(3), pages 1-21, July.
  13. Steven J. Davis & R. Jason Faberman & John C. Haltiwanger & Ian Rucker, 2010. "Adjusted Estimates of Worker Flows and Job Openings in JOLTS," NBER Chapters, in: Labor in the New Economy, pages 187-216 National Bureau of Economic Research, Inc.
  14. Marcus Eliason & Donald Storrie, 2009. "Does Job Loss Shorten Life?," Journal of Human Resources, University of Wisconsin Press, vol. 44(2).
  15. Mari Rege & Kjetil Telle & Mark Votruba, 2009. "The Effect of Plant Downsizing on Disability Pension Utilization," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 754-785, 06.
  16. Till von Wachter & Jae Song & Joyce Manchester, 2008. "Long-Term Earnings Losses due to Job Separation During the 1982 Recession: An Analysis Using Longitudinal Administrative Data from 1974 to 2004," Discussion Papers 0708-16, Columbia University, Department of Economics.
  17. Davis, Steven J. & Faberman, R. Jason & Haltiwanger, John, 2012. "Labor market flows in the cross section and over time," Journal of Monetary Economics, Elsevier, vol. 59(1), pages 1-18.
  18. Katharine G. Abraham & James R. Spletzer & Michael Harper, 2010. "Labor in the New Economy," NBER Books, National Bureau of Economic Research, Inc, number abra08-1, October.
  19. Maxim Poletaev & Chris Robinson, 2008. "Human Capital Specificity: Evidence from the Dictionary of Occupational Titles and Displaced Worker Surveys, 1984-2000," Journal of Labor Economics, University of Chicago Press, vol. 26(3), pages 387-420, 07.
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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. Huttunen, Kristiina & Kellokumpu, Jenni, 2012. "The effect of job displacement on couples' fertility decisions," MPRA Paper 36964, University Library of Munich, Germany.
  2. 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).
  3. Y. Ge & H. Lehmann, 2013. "The Costs of Worker Displacement in Urban Labor Markets of China," Working Papers wp876, Dipartimento Scienze Economiche, Universita' di Bologna.

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