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Life Cycle Effects of Job Displacement in Brazil

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  • Hoek, Jasper

    ()
    (Federal Reserve Board of Governors)

Abstract

This paper estimates the consequences of the decline of the Brazilian manufacturing sector for displaced workers. I estimate that earnings decline by nearly 50% after displacement relative to one year prior. About a quarter of the initial earnings loss is attributable to reduced hours of work rather than lower wages. However, hours recover fully within one year of displacement, while wages remain about a third lower. Allowing the displacement effect to differ by age yields a surprising U-shaped curve. Middle aged workers are hit hardest by a layoff, with younger and older workers relatively better off. For workers aged 35-40, the initial earnings loss reaches 70%. This is a surprising finding because most theories of job loss predict a negative relationship between the wage loss on displacement and the length of tenure on the pre-displacement job, which is increasing in age. I account for these facts with a simple model in which the ratio of specific to general human capital reaches a peak at middle age. Young workers have little specific capital and a low specific-general human capital ratio. In the early years of one’s career, specific capital (whether due to investments in specific skills or in search) accumulates much more rapidly than general human capital. Around ages 35 to 40, this trend reverses and the returns to general skills rise more rapidly. Thus, the accumulation of general skills serves to reduce the effect of job displacement at older ages despite increasing average job tenure. These findings suggest that major market reforms may have larger than anticipated effects because the primary losers are workers in the middle of their working life. This is also important from a welfare perspective because these workers are the most likely to fall through the cracks of social safety nets, which typically target younger and older workers.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2291.

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Length: 35 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2291

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Keywords: job displacement; structural adjustment; specific capital;

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References

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  1. Ruhm, Christopher J, 1991. "Are Workers Permanently Scarred by Job Displacements?," American Economic Review, American Economic Association, vol. 81(1), pages 319-24, March.
  2. Bellmann Lutz & Estrin Saul & Lehmann Hartmut & Wadsworth Jonathan, 1995. "The Eastern German Labor Market in Transition: Gross Flow Estimates from Panel Data," Journal of Comparative Economics, Elsevier, vol. 20(2), pages 139-170, April.
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  5. Naercio Menezes-Filho, 2004. "The Costs of Displacement in Brazil," Econometric Society 2004 Latin American Meetings 200, Econometric Society.
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  7. Louis S. Jacobson & Robert J. LaLonde & Daniel G. Sullivan, 1992. "Earnings losses of displaced workers," Working Paper Series, Macroeconomic Issues 92-28, Federal Reserve Bank of Chicago.
  8. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-90, October.
  9. Terrell, Katherine & Sorm, Vit, 1999. "Labor Market Policies and Unemployment in the Czech Republic," Journal of Comparative Economics, Elsevier, vol. 27(1), pages 33-60, March.
  10. John Micklewright & Gyula Nagy, 1997. "The Implications of Exhausting Unemployment Insurance Entitlement in Hungary," Innocenti Occasional Papers, Economic Policy Series iopeps97/8, UNICEF Innocenti Research Centre.
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  12. Ashenfelter, Orley C, 1978. "Estimating the Effect of Training Programs on Earnings," The Review of Economics and Statistics, MIT Press, vol. 60(1), pages 47-57, February.
  13. Card, David & Sullivan, Daniel G, 1988. "Measuring the Effect of Subsidized Training Programs on Movements in and out of Employment," Econometrica, Econometric Society, vol. 56(3), pages 497-530, May.
  14. Gustavo Gonzaga, 2003. "Labor Turnover and Labor Legislation in Brazil," Textos para discussão 475, Department of Economics PUC-Rio (Brazil).
  15. Stevens, Ann Huff, 1997. "Persistent Effects of Job Displacement: The Importance of Multiple Job Losses," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 165-88, January.
  16. Farber, Henry S., 1999. "Mobility and stability: The dynamics of job change in labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 37, pages 2439-2483 Elsevier.
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  18. Topel, Robert, 1990. "Specific capital and unemployment: Measuring the costs and consequences of job loss," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 33(1), pages 181-214, January.
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  21. repec:fth:prinin:303 is not listed on IDEAS
  22. Kletzer, Lori Gladstein, 1989. "Returns to Seniority after Permanent Job Loss," American Economic Review, American Economic Association, vol. 79(3), pages 536-43, June.
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Citations

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Cited by:
  1. 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.
  2. Richard B. Freeman, 2009. "Labor Regulations, Unions, and Social Protection in Developing Countries: Market distortions or Efficient Institutions?," NBER Working Papers 14789, National Bureau of Economic Research, Inc.
  3. Justesen, Michael, 2008. "Is the window of opportunity closing for Brazilian youth? Labor market trends and business cycle effects," Social Protection Discussion Papers 47188, The World Bank.

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