Why Do Earnings Fall with Job Displacement?

William J. Carrington and Bruce Fallick

No 1405, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: The earnings of workers are reduced for many years after being displaced from their jobs, and those workers and their families face increased risk of other problems as well. The ills suffered by displaced workers motivated several recent expansions of government programs, including the unemployment insurance system, and have spurred calls for wage insurance that would provide longerrun earnings replacement. However, while the magnitude of the losses is relatively clear, the theory of why displacement matters is scattered and somewhat undeveloped. Much of the policy discussion appears to interpret displacementinduced losses through the lens of specifi c human capital theory, and there is considerable empirical support for that model. But there are several other theories of why job displacement is costly. This paper reviews theories of costly job displacement and discusses their consistency with the available empirical evidence. We find that theories of human capital and matching are an important perspective on the losses of displaced workers, but we cannot rule out important roles for other theories, some of which suggest different policy responses.

Keywords: Displaced workers; earnings loss; human capital; matching (search for similar items in EconPapers)
JEL-codes: D13 D82 I20 J31 J63 J64 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2014-06-02
New Economics Papers: this item is included in nep-hrm, nep-lab and nep-lma
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Citations: View citations in EconPapers (2)

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DOI: 10.26509/frbc-wp-201405

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