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The Effects of Job Displacement on Post-Displacement Earnings
Abstract
The purpose of this research is to examine the long-term effects of job displacement on the subsequent earnings of displaced workers. Previous empirical research has suggested that job displacement reduces the short-term post-displacement earnings an average of about 15 percent relative to what their earnings would have been had they not been displaced. This research uses a fixed effects model and data over a 22-year period from the PSID to assess the long-term earnings effects of job displacement. The results support and extend previous research in finding that earnings losses due to job displacement are substantial and persist for many years.
... employment, because the new job usually pays less than the old one. Daymont (2001Daymont ( /2002 reports that earnings after job loss average a 15 % reduction, with larger losses for employees with longer tenure on the job. Average earnings decline by about 25 % in the year of, and in the year after, the job loss and remain 11 % lower 2 or 3 years later, with significant losses persisting even 10-12 years after the original job loss (Daymont 2001(Daymont /2001). ...
... employment, because the new job usually pays less than the old one. Daymont (2001Daymont ( /2002 reports that earnings after job loss average a 15 % reduction, with larger losses for employees with longer tenure on the job. Average earnings decline by about 25 % in the year of, and in the year after, the job loss and remain 11 % lower 2 or 3 years later, with significant losses persisting even 10-12 years after the original job loss (Daymont 2001(Daymont /2001). ...
... Daymont (2001Daymont ( /2002 reports that earnings after job loss average a 15 % reduction, with larger losses for employees with longer tenure on the job. Average earnings decline by about 25 % in the year of, and in the year after, the job loss and remain 11 % lower 2 or 3 years later, with significant losses persisting even 10-12 years after the original job loss (Daymont 2001(Daymont /2001). ...
Dismissal is a major issue for distributive justice at work, because it normally has a drastic impact on an employee’s livelihood, self-esteem and future career. This article examines distributive justice under the US’s employment-at-will (EAW) system and New Zealand’s just-cause dismissal system, focusing on the three main categories of dismissal, namely misconduct, poor performance and redundancy. Under EAW, employees have limited protection from dismissal and remedies are restricted to just a few so-called exceptions. Comparatively, New Zealand’s just-cause system delivers much more just outcomes, both in terms of remedies and punishments. Despite a few shortcomings, it should be considered as a reasonable reference for policy changes in the US.
The potentially large deadweight losses from severance pay or “firing costs ” raise the possibility that unemployment insurance savings accounts or, more generally, provident funds might be optimal in some risk and information environments. In this paper I assess the potential value of these mechanisms for smoothing consumption following permanent job displacement. Predicted distortions are sensitive to the economic environment, including assumptions about (i) the precise form of the job displacement risk, (ii) worker myopia and (iii) the prevalence and structure of informal labor markets. The estimation of work place distortions, whether of worker search and job acceptance strategies or of employer layoff strategies, requires careful specification of the program. Seemingly disparate programs converge in structure and consequences across program designs and economic circumstances. Illustrative examples are drawn from the U.S. experience. Concerns about the impact of firing costs, including most prominently government mandated severance pay, have led to consideration of alternative consumption smoothing devices, including unemployment insurance savings accounts (UISA), Vodopivec and Raju
Displaced workers, especially long tenured workers, face large human capital losses. Private firms frequently offer insurance against this threat in the form of severance pay – scheduled benefits linked in expectation to the worker’s human capital loss. We explore this linkage, first reviewing common severance benefit algorithms and then comparing them with simple models of capitalized job displacement losses on data from the Displaced Worker Surveys of 2000 and of 2004. The standard benefit formula of one week’s pay per year of service offers payments roughly in proportion to expected capital losses, but with a proportionality factor of only one quarter of capitalized losses (at 9 percent). Despite the systematic relationship between tenure/age and displacement losses, these factors explain little of the total variation in displacement losses, raising obvious insurance efficiency concerns. Cross-sectional estimates from more complete models, however, uncover no admissible factors currently neglected in standard severance contracts, although the jump in earnings losses between displacements in the robust market of 1997-1999 and the difficult labor market of 2000-2003 does suggest conditioning benefits on market conditions.
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