Recessions and the Cost of Job Loss

If the unemployment rate is above 8 percent, the average earnings loss [for men under the age of 50 who lose their jobs, with at least three years of job tenure] equals 2.8 years of pre-displacement earnings.

Economic downturns bring increases in permanent layoffs, even among workers with high prior tenure on the job. Using Social Security records for U.S. workers covering more than 30 years (1974-2005), researchers Steven J. Davis and Till von Wachter explore the cumulative earnings losses associated with what they call "job displacement." They are particularly interested in the role of labor market conditions at the time of job displacement in determining the magnitude of these losses.

In Recessions and the Cost of Job Loss (NBER Working Paper No. 17638), they find that for men under the age of 50 with three or more years of job tenure, job loss reduces the present value of earnings by an estimated $77,557 (2000 dollars). This amount is estimated over a 20-year period using a 5 percent annual discount rate. The estimated losses are even larger for men with more job tenure, but are smaller for women.

The researchers further find that earnings losses rise steeply with the unemployment rate at the time of displacement. If the unemployment rate at the time of displacement is less than 6 percent, then the average earnings loss equals 1.4 years of pre-displacement earnings. If the unemployment rate is above 8 percent, the average earnings loss equals 2.8 years of pre-displacement earnings.

The evidence suggests that tight labor market conditions at the time of displacement strongly improve the medium- and long-term future earnings prospects of displaced workers. Because job-finding rates among the unemployed are highly pro-cyclical, tight labor market conditions also strengthen near-term re-employment and earnings prospects.

--Lester Picker