Q & A on the consequences of layoffs w/Institute postdoctoral scholar Claudia Macaluso

Q: Your research studies the consequences of layoffs. Why do you think this should be at the center of the research agenda?
A: Layoffs are a traumatic experience for the individuals who go through it: in my recent research paper “Skill remoteness and post-layoff labor market outcomes,” I find that workers who involuntarily separate from their job suffer long-term negative consequences in terms of earnings and career stability. They often change occupation after job loss, and have a higher rate of migration than the overall population. These effects are larger for workers who are locally skill-remote, i.e. whose skills are not common to other jobs in their city.

Layoffs are also a potential signal of distress for the entire economy. Indeed, an unusually high rate of layoffs is the very definition of an economic downturn. Furthermore, even in good times, the rate at which laid-off workers find a new job, and the quality of the match between the worker and the job, are important factors to gauge the health of the labor market. In my research, I show that the U.S. aggregate labor market is rather fragmented into heterogeneous local ones, and how efficient is the market in reallocating unemployed workers to jobs differs greatly across metropolitan areas.

Q: Does this imply that some workers are more vulnerable than others to the negative consequences of layoff?
A: There is extensive empirical evidence that supports this conclusion. I find that workers whose skills are common to many jobs in their city can find a job faster and at a better wage rate than those whose skills are used in a minority of jobs in their local area.

To put things into context, let’s consider production workers—an occupational category that has experienced a relatively high layoff rate in the last decade. I find that, on average, a production worker in Detroit, Michigan finds a job 10 days faster and at a 15 percent higher wage than a comparable production worker in Youngstown, Ohio. This relates to the fact that Detroit is a large hub for manufacturing and, although the automotive industry is declining, high-tech manufacturing is on the rise, so production skills are in demand in a large share of jobs in Detroit. Youngstown, instead, is the site of a large car manufacturing plant that employs about 5,000 workers; however, the next two largest employers are the local hospital and the local state university—where jobs are unlikely to use production skills. In this sense, production workers in Youngstown are more exposed to unemployment, career disruption and mismatch after job loss.

Mismatch in future jobs is an especially important component: the 15 percent wage gap between the production worker in Detroit and the one in Youngstown persists for at least two years, and about half of this effect is due to occupational change. Displaced workers whose skills are not a good fit for their city’s job mix tend to change occupation more often, thus losing specific human capital accumulated in the previous job.

Q: Are these results relevant for policy?
A: I believe so, and in a couple of different ways. First of all, my results show that there is not such a thing as the labor market. Labor markets in the U.S. are geographically distinct, somewhat narrow (over 85 percent of people never apply to jobs outside their metropolitan area), and heterogeneous in their job mix. This heterogeneity affects the employment prospects, future wages and labor mobility patterns for unemployed workers—so I conclude that my research suggests to incorporate local area statistics, in addition to aggregate numbers, into economic policy.

Furthermore, I find that locally skill-remote workers tend to find a job on average 10 days later than their skill-central counterparts, but earn significantly lower wages for more than two years after layoff. This suggests that 1) the health of the local labor market cannot be assessed purely by looking at the unemployment rate, instead the rate of wage growth is also a useful indicator, and 2) workers may be constrained in their job search because of financial reasons, thus accepting a job that does not suit their human capital but “pays the bills.” In as much as this type of mismatch between workers and jobs yields lower productivity, as the evidence on wages strongly supports, there is reason for concern.