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Long-Term Earnings Losses due to Mass Layoffs During the 1982 Recession: An Analysis Using U.S. Administrative Data from 1974 to 2004

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Abstract

This paper uses longitudinal data from Social Security records covering up to 30 years of earnings to present the first national estimates of the long-term cost of job displacements during the 1982 recession. We use a new longitudinal data set containing firm size to isolate workers who separate from their stable job during a sudden mass-layoff. When we compare the workers displaced from their jobs to similar non-displaced workers, we find large immediate losses in annual earnings of 30%. After 15 to 20 years, these losses are still 20% and thus represent a significant setback in workers' life-time resources. Our estimates are robust to alternative specifications including industry-year or firm-year effects, also hold for workers with weak prior job attachment, and are strong and long-lasting for all age- and industry-groups we study. They are still large and permanent, albeit somewhat smaller, for workers displaced at the peak of the late 1980s recovery. Our estimates confirm the larger range of estimates from previous studies based on single U.S. states and selected samples of workers.

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... For structural analyses of trade shocks and labor market dynamics in the presence of search frictions and entry and exit costs, see Helpman, Itskhoki, and Redding (2010), Helpman et al. (2012), ), Dix-Carneiro (2014, and Coşar, Guner and Tybout (2011). 8. See also Sullivan and von Wachter (2009), von Wachter, Song, and Manchester (2009), and Couch and Placzek (2010 for recent work that uses administrative data, and see Neal (1995), Parent (2000), and Chan and Stevens (2001) for representative work on job loss using survey data. An alternative approach to study job loss uses the CPS Displaced Workers Survey (e.g., Addison, Fox, and Ruhm 1995;Kletzer 2000;Farber 2005). ...
... We further perform falsification tests to verify that future increases in trade exposure do not predict past changes 9. These results contrast with earlier literature on mass layoffs, which finds that earnings losses for affected workers are relatively uniform across worker type (e.g., Jacobson, LaLonde and Sullivan 1993;von Wachter, Manchester, and Song 2009). 10. ...
... Although trade exposure significantly increases the likelihood that a low-wage worker leaves the initial firm during a mass layoff, the only significant effect among high-wage workers is for separations before mass layoffs. This difference in pre-mass layoff separations between low-and high-wage workers is naturally absent in the mass layoff literature because that work focuses exclusively on workers who have separated during a mass layoff (e.g., Jacobson, LaLonde, and Sullivan 1993;von Wachter, Song, and Manchester 2009). In contrast to existing literature that concludes that mass layoffs have equally scarring effects for workers of all skill levels, our results suggest instead that high-wage workers are less exposed to mass layoffs and are more likely to leave their initial firm in a prelayoff period when presumably a larger fraction of separations is voluntary. ...
Article
In the past two decades, China’s manufacturing exports have grown spectacularly, U.S. imports from China have surged, but U.S. exports to China have increased only modestly. Using representative, longitudinal data on individual earnings by employer, we analyze the effect of exposure to import competition on earnings and employment of U.S. workers over 1992 through 2007. Individuals who in 1991 worked in manufacturing industries that experienced high subsequent import growth garner lower cumulative earnings and are at elevated risk of exiting the labor force and obtaining public disability benefits. They spend less time working for their initial employers, less time in their initial two-digit manufacturing industries, and more time working elsewhere in manufacturing and outside of manufacturing. Earnings losses are larger for individuals with low initial wages, low initial tenure, low attachment to the labor force, and those employed at large firms with low wage levels. Import competition also induces substantial job churning among high-wage workers, but they are better able than low-wage workers to move across employers with minimal earnings losses, and are less likely to leave their initial firm during a mass layoff. These findings, which are robust to a large set of worker, firm and industry controls, and various alternative measures of trade exposure, reveal that there are significant worker-level adjustment costs to import shocks, and that adjustment is highly uneven across workers according to their conditions of employment in the pre-shock period.
... Our findings help reconcile the divergent findings on the earnings consequences from job change: inclusion of workers with longer nonemployment spells is a key reason the displaced worker literature finds job separations generally harm workers, while the job mobility literature, with a focus on direct job-to-job moves, finds that workers benefit. 3 1 Other papers in the displaced worker literature include Schoeni and Dardia (2003); Couch and Placzek (2010); von Wachter, Song and Manchester (2009); and Davis and von Wachter (2011). More recent papers on job-to-job moves include Brown, Haltiwanger, and Lane (2006) ;Haltiwanger, et al. (2018aHaltiwanger, et al. ( , 2018b; and Liu (2019). 2 Much of the displaced worker literature uses mass layoff events to identify displaced workers and we use this same approach here. ...
... The 1 In addition, JLS restricted their sample to workers with positive earnings in every calendar year, whereas we require positive earnings within eight quarters of separation. Von Wachter, Song, and Manchester (2009) show that the earnings losses for non-distressed separators are larger and more persistent when separators with zero annual earnings are included in the sample. JLS also appear to limit their sample of stayers to stayers at firms that experienced some separations. ...
... being laid off). 4 We focus on job displacements because of their plausible exogeneity (von Wachter et al., 2009) and because these events are followed by large and persistent earnings losses, on average. We follow the standard difference-in-difference methodology of Jacobson et al. (1993) to document the earnings losses of displaced workers in the PSID, but we analyze separately these losses by workers who lived in and out of their parents' neighborhoods at the time of displacement. ...
... Early literature reviews includeHamermesh (1989),Fallick (1996), andKletzer (1998). More recent work includes vonWachter et al. (2009) andDavis and von Wachter (2011).5 We cannot reject the hypothesis that the earnings recovery of workers coresiding with their parents prior to displacement is the same as those living in their parents' neighborhoods but not coresiding. ...
Thesis
This dissertation uses changes across space to understand economic inequality. Chapter one examines people’s ties to places. If people are tied to places by family and experiences, then welfare will be less equal across space. It presents evidence that this is the case, with formulae that show how this makes local policies less wasteful in declining areas. Chapter two shows that young adults, ages 25 to 35, who live in the same neighborhoods as their parents experience stronger earnings recoveries after a job displacement than those who live farther away. It presents some evidence that these differences are driven by parental help with grandchildren and perhaps help from parents in identifying new jobs. Chapter three uses changes in housing prices and rents to study inequality in standards of living. It suggests that changes in income inequality since 1930 have caused similar changes in housing expenditures, mostly through changes in the value of particular neighborhoods.
... Additional analyses of income losses due to job loss, using different data sets and methodologies, find substantial income losses well after initial displacement. Couch and Placzek (2010) found earnings losses of 15 percent for six years; Rothstein (2015), Davis andvon Wachter (2011) , andvon Wachter, Song, andManchester (2009) found losses of approximately 20 percent for as long as 20 years, with losses higher for displacement that occurs during a recession; and Jacobson, Lalaonde, and Sullivan (1993) find losses averaging 25 percent per year. ...
... Additional analyses of income losses due to job loss, using different data sets and methodologies, find substantial income losses well after initial displacement. Couch and Placzek (2010) found earnings losses of 15 percent for six years; Rothstein (2015), Davis andvon Wachter (2011) , andvon Wachter, Song, andManchester (2009) found losses of approximately 20 percent for as long as 20 years, with losses higher for displacement that occurs during a recession; and Jacobson, Lalaonde, and Sullivan (1993) find losses averaging 25 percent per year. ...
... Because we use a measure of mass layoffs as our measure of a demand shock, this project is connected to several other segments of the labor and macro literature. Many prior studies have used worker-level data to examine the effect of a mass layoff on earnings and employment (Jacobson, LaLonde, and Sullivan 1993;Stevens 1997;von Wachter, Song, and Manchester 2009;Fallick, Haltiwanger, and McEntarfer 2012). Additionally, Jacobson et al. (1993) andvon Wachter et al. (2009) found evidence that workers who lost their jobs during mass layoff events were similar in terms of earnings levels and age as other laid off workers. ...
... Many prior studies have used worker-level data to examine the effect of a mass layoff on earnings and employment (Jacobson, LaLonde, and Sullivan 1993;Stevens 1997;von Wachter, Song, and Manchester 2009;Fallick, Haltiwanger, and McEntarfer 2012). Additionally, Jacobson et al. (1993) andvon Wachter et al. (2009) found evidence that workers who lost their jobs during mass layoff events were similar in terms of earnings levels and age as other laid off workers. This evidence suggests that workers involved in mass layoffs are not positively or negatively selected on worker quality. ...
Article
Large shocks to local labor markets can cause long-lasting changes to employment, unemployment, and the local labor force. This study examines the relationship between mass layoffs and the long-run size of the local labor force. The authors consider four main channels through which the local labor force may adjust: in-migration, out-migration, retirement, and disability insurance enrollment. These channels, primarily out-migration, account for more than half of the labor force reduction over the past two decades. Findings show, however, that during and after the Great Recession, instead of out-migration, non-participation in the labor force grew to account for most of the local labor force exits following a mass layoff.
... Additional analyses of income losses due to job loss, using different data sets and methodologies, find substantial income losses well after initial displacement. Couch and Placzek (2010) found earnings losses of 15 percent for six years; Rothstein (2015), Davis andvon Wachter (2011) , andvon Wachter, Song, andManchester (2009) found losses of approximately 20 percent for as long as 20 years, with losses higher for displacement that occurs during a recession; and Jacobson, Lalaonde, and Sullivan (1993) find losses averaging 25 percent per year. ...
... Additional analyses of income losses due to job loss, using different data sets and methodologies, find substantial income losses well after initial displacement. Couch and Placzek (2010) found earnings losses of 15 percent for six years; Rothstein (2015), Davis andvon Wachter (2011) , andvon Wachter, Song, andManchester (2009) found losses of approximately 20 percent for as long as 20 years, with losses higher for displacement that occurs during a recession; and Jacobson, Lalaonde, and Sullivan (1993) find losses averaging 25 percent per year. ...
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The United States is falling behind many other rich nations on a broad spectrum of measures of the quality of life. These include social mobility, inequality, education, crime, health and longevity. Polls suggest that many Americans have not only lost their optimism concerning the future, but have become angry as well. This article sets forth the elements of a new social contract, one that would deliver substantial results almost overnight and which conforms to the traditional American values of the importance of work, that everyone should have a fair opportunity for upwards mobility, and the central importance of the family. This proposal is composed of two parts: The first is guaranteed employment, and where necessary, the retraining required to enable workers to successfully enter the regular workforce. The second is universal child care to give all parents the possibility of participating in the labor force. The article discusses in depth how these measures would reverse the relative decline in quality of life in America. It also reveals how, although these measures would be costly, their payoff for the economy would far offset the costs.
... The consequences of job loss on the duration of unemployment and the magnitude of wage penalties are more severe during economic downturns, and the consequences last longer. A study of mass layoffs during the 1982 recession showed that even 15 to 20 years after workers were laid off, their annual earnings were still 20% lower than those of comparable workers who did not suffer a layoff (Von Wachter, Song, and Manchester 2009). Research on how economic conditions might moderate the relationship between job loss, unemployment, and health has been more limited. ...
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... The direct loss of wages affects short-term income gains and the indirect loss of skills has long-term wage effects. After 20 years, the wages of those who were separated from employment during the 1981 -1982 recession still did not catch up to that of those who remained employed during the recession but are currently similarly employed (Wachter, Song, and Manchester 2009). Additionally, unemployment contributes to overall slack in the labor market, which reduces wages for those who remain employed but are at risk of unemployment. ...
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This article examines the differences in the distributional effects of economic growth. While all incumbents are incentivized to create economic growth in order to win reelection, they use a diverse variety of policies to achieve this growth. These policy choices are often congruent with the demands of the core constituent groups of the respective parties. This suggests that economic growth is not equally shared by all, but that some groups are more or less benefited from the sets of policies chosen by the incumbent parties to stimulate growth. We test this proposition by investigating the effects of economic growth on stock market performance and unemployment. Our results show that economic growth under Republican presidents has a stronger effect on stimulating stock market performance, while economic growth under Democratic presidents has a stronger effect on reducing unemployment. Overall, these results highlight the partisan differences in macroeconomic policy and illustrate one of the causal mechanisms behind the substantial and rising economic inequality in the USA.
... Not surprisingly, macro-economic conditions are inextricably intertwined with the labor market outcomes for displaced workers. Individuals who lose their jobs during periods of high unemployment are more likely to remain unemployed for a longer period of time and are less likely to recover their pre-displacement wages (Von Wachter et al., 2009; Davis and von Wachter, 2011). ...
... Studies have shown that those who experience unemployment early in their life are more likely to be unemployed again in later years. Moreover, they are likely to earn less over their working life than are their peers who find jobs more easily (von Wachter, Song, and Manchester, 2009;Kahn, 2010). Experts call the negative long-term consequences of early unemployment "scarring effects. ...
Article
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... Since the average worker experiences displacements during his lifetime it might be natural to include individuals who may experience displacement at some point in their work history in the control group. Most recently, Davis and von Wachter (2011), based on work by von Wachter et al. (2007), have used this approach, which gives a different picture of the earnings losses of displaced workers. In essence, the treatment group is made up of those individuals who experience displacement in a particular year, and the control group is composed of those who do not experience a displacement in a particular year, but could experience displacement before or after the particular year. ...
Article
This dissertation applies theory and empirical analysis to help explain the earnings experience of involuntary job losers. Chapter II shows that sheer misfortune can account for the entirety of earnings losses experienced by displaced workers. Coming out of unemployment, ex-ante identical workers start in employment relationships that are, on average, less profitable than their jobs prior to separation. Since workers have to look for their ideal job while employed, it takes time for newly hired workers to move up the job ladder and to find a good quality match. This induces a slow recovery in earnings after displacement. The model successfully matches observed wage dispersion, and this in large part explains the success of the model. As a result of serial correlation in displacements, the framework also delivers the empirical decomposition of earnings losses into lower wages and lower employment. Chapter III investigates the implications of job displacement for the aggregate labor market. The framework features large movements of unemployment during recessions. Due to low match-qualities among new hires, many employment relationships exist near the reservation frontier, which results in a large burst of layoffs at the onset of a recession. Since poor quality employment relationships are destroyed at the beginning of a recession, the average match-quality rises initially (cleansing effect). Due to fewer posted vacancies and lower job-finding rates, the average match-quality begins to fall (sullying effect). The model also delivers substantial propagation of aggregate productivity shocks due to the slow movement of workers up the job ladder. Chapter IV uses data from the Panel Study of Income Dynamics to present results from two popular empirical approaches and describes the difference between them. The specification that uses the never displaced as a control group implies much larger earnings losses than a specification that uses those not displaced in a given year as the control group. The analysis shows that despite substantial differences in the incidence of displacement, the earnings losses conditional on displacement are similar. Finally, this chapter presents new evidence on earnings losses by worker characteristics, including heterogeneity by pre-displacement wealth.
... See OECD (2013) for a detailed literature review of the impact of displacement on workers' earnings in the OECD countries may be tracked for a long period of time, which allows researchers to analyse the long-term consequences of displacement (von Wachter et al, 2007). In addition, the large number of observations may be used to test heterogeneity in the effects (between men and women for instance). ...
... Yet, as documented by Levy, Mouw, and Perez (this volume), regional mobility rates have declined slightly during the Great Recession, and workers were about as likely to move for economic reasons as before. In the after-math of a job loss, mobility between jobs and industries tends to increase (von Wachter, Song, and Manchester 2011;Stevens 1997). These movements are associated with further wage declines. ...
... 18 Von Wachter, Song, and Manchester (2009) found an average earnings loss of 20% in the first year compared to not-displaced coworkers. ...
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This paper presents a new approach to the measurement of the effects of spatial mismatch that takes advantage of matched employeremployee administrative data integrated with a person-specific job accessibility measure, as well as demographic and neighborhood characteristics. We focus on a group of job searchers for plausibly exogenous reasons: lower-income workers with strong labor force attachment separated during a mass layoff. Our results support the spatial mismatch hypothesis. We find that better job accessibility significantly decreases the duration of joblessness among lower-income displaced workers, especially for blacks, women, and older workers. © 2018 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
... Furthermore, in comparison to their peers who find jobs ISBN: 978-1-63248-071-2 doi: 10.15224/ 978-1-63248-071-2-33 easily in early life, they earn less across their working life. [2]. Youth unemployment leads to income inequality which often leads to inequality in family income also. ...
... In addressing this question, we take into account both the prior level and the prior trajectory of earnings. Our formal analysis borrows heavily from the approach taken in the job displacement literature (e.g., Farber 1993Farber , 1997Farber , 2005Farber , 2013Farber , 2015Jacobson, LaLonde, and Sullivan 1993;Couch and Placzek 2010;Davis and von Wachter 2011;von Wachter, Song, and Manchester 2011). One difference between the population of displaced workers-typically, long-tenure workers who have lost their jobs during a mass layoff-and the population of unemployed individuals we study is that the unemployed include not only job losers but also new entrants to the labor market, labor market re-entrants, and people who voluntarily left their previous job. ...
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... The economic downturn leads to longer durations of unemployment (Kroft et al., 2016). Falling revenues and rising costs of firms leads to job loss for workers (Fairlie, 2013;Von Wachter et al., 2009). Unlike regular times, 7 https://www.brusselstimes.com/all-news/eu-affairs/100505/danish-government-will-pay-75-ofthreatened-private-sector-salaries/ ...
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We introduce a new hybrid approach to joint estimation of Value at Risk (VaR) and Expected Shortfall (ES) for high quantiles of return distributions. We investigate the relative performance of VaR and ES models using daily returns for sixteen stock market indices (eight from developed and eight from emerging markets) prior to and during the 2008 financial crisis. In addition to widely used VaR and ES models, we also study the behavior of conditional and unconditional extreme value (EV) models to generate 99 percent confidence level estimates as well as developing a new loss function that relates tail losses to ES forecasts. Backtesting results show that only our proposed new hybrid and Extreme Value (EV)-based VaR models provide adequate protection in both developed and emerging markets, but that the hybrid approach does this at a significantly lower cost in capital reserves. In ES estimation the hybrid model yields the smallest error statistics surpassing even the EV models, especially in the developed markets.
The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right? pp. 1-24 BrowningUnemployment Insurance Levels and Consumption Changes
  • Bound
  • Alan B John
  • Krueger
  • T F Martin
  • Crossley
Bound, John and Alan B. Krueger (1991). The Extent of Measurement Error in Longitudinal Earnings Data: Do Two Wrongs Make a Right?’ Journal of Labor Economics, Vol. 9, No. 1 pp. 1-24 Browning, Martin and T.F. Crossley (2001). ‘Unemployment Insurance Levels and Consumption Changes.’ Journal of Public Economics. 80(1):1-23 Chan, Sewin and Ann Huff Stevens (2001) “Job Loss and Employment Patterns of Older Workers,” Journal of Labor Economics 19, 484-521