Must-Read: Steven J. Davis and Till M. von Wachter: Recessions and the Cost of Job Loss
Must-Read: When the unemployment rare is low, economic disruption has a substantial but not overwhelming cost to workers who lose their jobs. Steve Davis and Till von Wachter peg it at 1.5 years’ worth of pre-displacement earnings for workers caught up in a mass layoff when the unemployment rate is below 6%. That cost doubles when the unemployment rate is above 8%.
Thus structural change and creative destruction are very costly things indeed–unless the Federal Reserve and other policy authorities can maintain a high-pressure economy. But we have not had a high-pressure economy since 2000…
: Recessions and the Cost of Job Loss:
Drawing on longitudinal Social Security records for U.S. workers from 1974 to 2008… men lose an average of 1.4 years of pre-displacement 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 pre-displacement earnings if displaced when the unemployment rate exceeds 8 percent… discounting at a 5% 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 model of Mortensen and Pissarides (1994) extended to include search on the job generates present value losses 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.