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Coping with labor market risk: Formal job loss and earnings dynamics in India

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  • Kumari, Gunjan
  • Gupta, Neha
  • Narayanan, K.

Abstract

This paper examines earnings dynamics of workers following the loss of formal employment, an area relatively underexplored in the context of developing economies like India. Leveraging high-frequency Consumer Pyramids Household Survey data, we document considerable churn in formal sector employment, disproportionately affecting low-productivity workers. Employing a dynamic difference-in-differences framework, we find that displacement from formal employment leads to a sharp and sustained decline in earnings. Contrary to prevailing evidence, workers displaced during COVID-19 downturn experienced a relatively faster earnings recovery than those displaced in pre-COVID period, highlighting their resilience against shock. Further, we find significant heterogeneity in post-displacement earnings losses, with sharper declines for workers from skill-intensive industries and occupations, and limited variation across education or prior earnings levels. Despite self-insurance efforts, formal job displacement results in substantial household income and welfare losses, highlighting the limitations of informal coping mechanisms and the need for public safety nets.

Suggested Citation

  • Kumari, Gunjan & Gupta, Neha & Narayanan, K., 2025. "Coping with labor market risk: Formal job loss and earnings dynamics in India," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325002251
    DOI: 10.1016/j.econmod.2025.107230
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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