Research Highlights

Lost Value of Skills Accumulated on the Job Is Central to Displaced Workers’ Earnings Losses

The loss of a high-paying employer explains only a fraction of the long-term earnings losses of workers displaced during the Great Recession, according to a new Upjohn Institute working paper by the Institute’s Marta Lachowska and Stephen Woodbury, and Alexandre Mas of Princeton University. The losses occurred mainly because displaced workers’ skills had a lower value in the labor market than to the specific employers where those skills had been accumulated.

Sources of Displaced Workers' Long-Term Earnings Losses” is the latest in a line of Upjohn Institute research on the topic, which includes The Costs of Worker Dislocation, a pioneering 1993 study by Louis Jacobson, Robert LaLonde, and Daniel Sullivan that is freely available for download. (See below for more research on worker displacement.)

Several studies have shown that long-tenure workers—those who have held their job for six or more years—suffer large, long-lasting earnings losses following displacement. But the reasons underlying these earnings losses have long been in question. Do they occur because displaced workers’ accumulated skills were valued only by the employer where they had been employed, because displaced workers lose jobs with high-paying employers, or for other reasons?

The Lachowska, Mas, and Woodbury study draws on unusually rich data from Washington state. The state reports hours worked, not just earnings, for all workers covered by its unemployment insurance system. This allows the researchers to break out how much of displaced workers’ losses came from working fewer hours versus earning lower hourly wages.

The researchers find that five years after job loss, workers’ earnings are still 16 percent less than a comparison group who remained employed, with 55 percent of the reduction coming from lower hourly wages, and 45 percent from reduced work hours.

But what accounts for these reduced wage rates and lost hours? Lachowska, Mas and Woodbury find that, overall, the loss of a high-paying employer accounts for only 11 percent of the average long-term earnings losses and about 25 percent of average long-term reduced hourly wage rates due to displacement. The loss of a “good” employer is important only for workers displaced from employers paying earnings premiums in the top quintile. For workers displaced from employers below the top quintile, the loss of a “good” employer plays a negligible role.

The minor importance of employer effects in displaced workers’ losses suggests a large role for factors like lost firm-specific human capital—skills acquired on the job that are valued only in the workplace where they were acquired—or the loss of a favorable specific job-match, in explaining displaced workers’ long-term losses.

The findings are consistent with two broad types of policy to assist displaced workers, according to the authors. First, effective reemployment services are promising because displaced workers’ primary need is to become reemployed and start re-accumulating specific skills valued by a new employer. By encouraging rapid reemployment, reemployment services address the main apparent reason for displaced workers’ earnings losses—the loss of employer-specific human capital (or the breakup of a good job match).

Second, a wage-rate subsidy would further encourage displaced workers to become reemployed quickly by increasing the rewards for working. In addition, a wage subsidy would offset displaced workers’ earnings losses by directly increasing a worker’s hourly wage. (For a discussion of wage-subsidy policy, see earlier Upjohn Institute research by Carl Davidson and Woodbury.)

Lachowska, Mas, and Woodbury’s research is supported by the Washington Center for Equitable Growth and the Russell Sage Foundation. The research is also published as an Equitable Growth working paper and a National Bureau of Economic Research working paper. Other Upjohn Institute research on this topic includes: