Job Loss and the Role of Public Policies for Vulnerable Workers

Job displacement generates large and persistent income losses. This paper examines how alternative social protection mechanisms mitigate the consequences of job loss in Uruguay, a middle-income country with a relatively well-developed social safety net. Using matched employer-employee administrative data, we combine variation from mass layoffs with difference-in-differences and regression-discontinuity designs to estimate the effects of job displacement and the insurance value of two policies: (i) a traditional contributory unemployment insurance program and (ii) a noncontributory conditional cash transfer program targeting low-income households. We document that after employment falls it gradually rebounds, while earnings decline sharply, with labor income falling by about 50% in the short term, and remain below pre-displacement levels even five years later. The persistent earnings losses are primarily driven by lower post-displacement wages. Comparing the insurance value of alternative policy responses, we find that the cash transfer program provides substantial protection for vulnerable and middle-income workers facing layoffs, while unemployment insurance does not generate comparable medium-term gains.