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Why Do Earnings Fall with Job Displacement?
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Why Do Earnings Fall with Job Displacement?

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  • William J. Carrington
  • Bruce Fallick

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.

Suggested Citation

  • William J. Carrington & Bruce Fallick, 2014. "Why Do Earnings Fall with Job Displacement?," Working Papers (Old Series) 1405, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1405
    DOI: 10.26509/frbc-wp-201405
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    2. Pawel Krolikowski, 2018. "Choosing a Control Group for Displaced Workers," ILR Review, Cornell University, ILR School, vol. 71(5), pages 1232-1254, October.

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    More about this item

    Keywords

    Displaced workers; earnings loss; human capital; matching;
    All these keywords.

    JEL classification:

    • D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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