Reconsidering the Cost of Job Loss: Evidence from Redundancies and Mass Layoffs

Abstract

This paper studies the consequences of job loss for workers, and explores differences in the cost of displacement using a novel research design. While the previous literature relies on mass layoffs and plant closures for identification, I exploit discontinuities in the likelihood of displacement generated by a last-in-first-out (LIFO) rule used at layoffs in Sweden. Matching data on individual layoff notifications to administrative records, I find that permanent earnings losses are present only among workers who lose their job during mass layoffs, whereas workers displaced in smaller layoffs fully recover within 7 years. The finding is robust to differences in overall economic conditions as well as industry and worker com position. Auxiliary analysis suggests that mass layoffs affect the entire local labor market thereby amplifying the effect of displacement.

Keywords: last-in-first-out, job loss, displaced worker, mass layoff, earnings loss

JEL Classification: J63, J64, J65