The Incidence and Costs of Job Loss: 1982-91
Brookings Papers on Economic Activity Microeconomics
The Incidence and Costs of Job Loss: 1982-91 THERE IS A PUBLIC PERCEPTION that the nature and consequences of job loss, defined here as the involuntary (from the worker's viewpoint) termination of employment with a particular firm, have changed qualitatively in recent years. The perception is that highly skilled whitecollar workers and workers with more tenure (time with their current employer) are becoming increasingly vulnerable to job loss, reduced subsequent earnings, and prolonged
... prolonged unemployment.' My goal in this study is to investigate whether and how the incidence and costs of job loss have changed in the last ten years. In other words, is the public perception correct? Data limitations make it difficult to get a perspective on who lost jobs prior to the 1980s. Since then, however, the Displaced Workers' Surveys (DWS), which have been regular supplements to the January Current Population Survey (CPS) at two-year intervals since 1984, have provided useful information on job loss. Specifically, these surveys ask workers if in the past five years they have "lost or left a job because of a plant closing, an employer going out of business, a layoff from which [they were] not recalled or other similar reason." These data I thank David Card for numerous helpful discussions that helped shape this paper. have much to tell about job loss. Augmented with data from mobility supplements in the January CPS in 1983, 1987, and 1991 and the merged outgoing rotation group CPS files from 1982 to 1991, they form the basis of my empirical analysis. I focus on two aspects of job loss. First, I examine evidence on the incidence of job loss by worker and job characteristics, including age, education, race, sex, industry, and tenure over the period 1982-91 to determine the extent to which higher-skilled workers have, in fact, become more vulnerable to job loss. This period covers an entire business cycle, with slack labor markets in 1982-83 and 1990-91 and an intervening expansion from 1984 through 1989.2 Additionally, this is a continuing period of sectoral shifts in the composition of employment away from goods-producing industries and toward service industries. The second aspect of job loss I focus on is its cost to the workers who are displaced. I examine evidence on the postdisplacement employment and earnings experience of displaced workers with various characteristics in order to measure not only the costs of displacement, but also if and how these costs have changed. Potential changes in the incidence and costs of job loss are of more than passing interest. Long-term employment relationships have played a central role in the U.S. economy, particularly for highly skilled workers.3 This is consistent with institutional arrangements that make younger, less-skilled, and less senior workers bear the brunt of downward adjustments in employment levels. Declines in labor demand are generally accommodated by laying off the least senior workers.4 Historically, less-skilled (blue-collar) workers have been more susceptible to 2. I use the labor economists' casual definition of a recession as a period of relatively high unemployment compared with surrounding periods. The unemployment rate was 9.5 percent in 1982 and 1983 and about 8 percent in 1992. The unemployment rate increased after 1991, so that by my definition a "recession" continued through 1992. 3. Tabulations of the mobility supplement to the January 1991 Current Population Survey show that median job tenure (time with current employer) by education level for men ages 31 to 60 was 2.4 years for men with fewer than twelve years of education, 6.1 years with twelve years of education, 6.2 years with thirteen to fifteen years of education, and .8.2 years with sixteen or more years of education. Tabulations of mobility supplements to early CPSs show a similar pattern by education category. Hall (1982) and Ureta (1992) present analyses of reported job tenure based on earlier CPSs that highlight the importance of long-term jobs. 4. Although more prevalent in the union sector, inverse seniority rules for layoff are also quite common in the nonunion sector. See Abraham and Medoff (1984). Henry S. Farber 75 layoffs than have been more-skilled (white-collar) workers. These institutional regularities may be an efficient response to the desire to have more job-specific capital embodied in higher-tenure and more-skilled workers. To the extent that the job security of these workers has become more tenuous, the willingness and ability of firms and workers to invest in job-specific capital is reduced, with adverse consequences for productivity. Some amount of job change plays a positive allocative role in ensuring that workers are matched with appropriate employers and that inappropriate matches can be ended. Any job change, however, has costs in a number of dimensions. Job-specific capital is lost, and the longer the relationship that ends, the more specific capital is likely to be lost. Additionally, workers (and perhaps firms) value stability per se. Finally, termination of a job may result in periods of unemployment, which has both private and social costs. More generally, long-term employment relationships may be important components of productivity growth. This productivity growth may well go beyond the usual growth in individual productivity that is associated with aging to encompass the human-capital component of new technologies. Changes in the incidence of job loss may be related to other social and economic phenomena of broader interest. Consider the public mood, which, as the 1992 elections showed, can have serious political, and perhaps economic, ramifications. The relatively slow growth of the economy (perhaps even a continuing recession) in 1991 and 1992 has resulted in public unhappiness with the economy that some have argued is far more extreme than warranted when measured against the "objective" economic situation in earlier recessions. For example, the socalled misery index, the sum of the unemployment and inflation rates, stood at 13.4 percent in 1983 (9.6 percent unemployment plus 3.8 percent inflation), and it was only 9.8 percent in 1991 (6.7 percent unemployment plus 3.1 percent inflation).5 One factor that might account for this difference in mood is a difference in the incidence of job loss by age, education, and tenure groups in the recent period relative to earlier recessions. Specifically, it may be the case that because those workers who have been best protected in a "typical" recession (older workers with more education) have experienced more job loss than 5. Council of Economic Advisers (1993, tables B-37 and B-59) . 76 Brookings Papers: Microeconomics 1993 usual and because these same workers may be more influential, the public mood seems darker. With increased import competition signaling dramatic sectoral shifts in employment over the last ten to twenty years, it is plausible that older high-tenure workers are more likely to be at risk to lose their jobs than was previously the case and that existing institutional arrangements may be less effective at protecting older and higher-skilled workers than they were in the past. Using the DWS data from 1984 through 1992 to study job loss from 1982 to 1991, I find that older and more-educated workers were relatively more likely to suffer job loss in the latter part of this period than in the early part. Nonetheless, job loss remained concentrated among younger and less-educated workers. I also find that job loss became more common in some important service industries and relatively less common in manufacturing during the latter part of the period. Supplementing the DWS data with data from the outgoing rotation groups of the CPS, I find that displaced workers, relative to nondisplaced workers, were less likely to be employed and, if employed, were more likely to be employed part-time. These effects declined with time since displacement. There is no systematic secular change in these costs of displacement, either in the aggregate or for particular groups. Finally, I examine the earnings losses of full-time reemployed displaced workers by comparing their earnings change with the earnings change of fulltime employed workers who were not displaced. I find, consistent with what others have found, that these earnings losses are substantial. Some Data Considerations: What Is a Job Loss? I analyze data on individuals between the ages of 20 and 64 from the DWS in 1984DWS in , 1986DWS in , 1988DWS in , 1990DWS in , and 1992 in order to investigate the incidence and costs of job loss. To my knowledge, no one before has used these data to study the incidence issue. All of the work of which I am aware using these data focuses on the postdisplacement employment and earnings experience of displaced workers.6 6. See, for example, Podgursky and Swaim (1987); Kletzer (1989); Topel (1990); and Gibbons and Katz (1991). Henry S. Farber 77 Each DWS asks workers if they were displaced from a job at any time in the preceding five-year period. Displacement is defined as involuntary separation based on operating decisions of the employer. Such events as a plant closing, an employer going out of business, or a layoff from which the worker was not recalled are considered displacement. Other events including quits and being fired for "poor work performance, disciplinary problems, or any other reason that is specific to that individual alone" are not considered displacement.7 Workers who are laid off from a job and rehired in a different position by the same employer are considered to have been displaced. Thus, the supplement is designed to focus on the loss of specific jobs resulting from business decisions of firms unrelated to the performance of particular workers. Job loss as measured in these data almost certainly does not represent all job loss about which I am concerned. Specifically, the distinction between quits and layoffs is not always clear. Firms may wish to reduce employment without laying off workers, and they might accomplish this by reducing or failing to raise wages.8 This can encourage workers (perhaps those least averse to the risk of a layoff) to quit. Other workers (perhaps those most averse to the risk of a layoff) might be prone to offering to continue to work at reduced wages. To the extent that these are important phenomena, the sample of displaced workers identified by the definition used in the DWS is a potentially nonrandom subsample of "truly displaced" workers. The potential consequences of this are difficult to gauge, but it is worth noting that the ability of workers to offer wage decreases to their employers is probably quite limited.