BPEA | Fall 2011

Recessions and the Costs of Job Loss

Steven J. Davis and
Steven Davis Headshot
Steven J. Davis William H. Abbott Professor of International Business and Economics - The University of Chicago Booth School of Business
Till von Wachter
Till von Wachter Columbia University

Fall 2011

We develop new evidence on the cumulative earnings losses
associated with job displacement, drawing on longitudinal Social Security
records from 1974 to 2008. In present-value terms, men lose an average of
1.4 years of predisplacement earnings if displaced in mass-layoff events that
occur when the national unemployment rate is below 6 percent. They lose
a staggering 2.8 years of predisplacement earnings if displaced when the
rate exceeds 8 percent. These results reflect discounting at a
5 percent annual rate over 20 years after displacement. We also document
large cyclical movements in the incidence of job loss and job displacement and
present evidence on how worker anxieties about job loss, wage cuts, and job
opportunities respond to contemporaneous economic conditions. Finally, we
confront leading models of unemployment fluctuations with evidence on the
present-value earnings losses associated with job displacement. The 1994
model of Dale Mortensen and Christopher Pissarides, extended to include
search on the job, generates present-value losses that are only one-fourth as
large as observed losses. Moreover, present-value losses in the model vary
little with aggregate conditions at the time of displacement, unlike the pattern
in the data.