How Destructive is Creative Destruction? The Costs of Worker Displacement

42 Pages Posted: 10 Oct 2006

See all articles by Kristiina Huttunen

Kristiina Huttunen

Uppsala University

Jarle Møen

Norwegian School of Economics (NHH) - Department of Business and Management Science

Kjell G. Salvanes

Norwegian School of Economics (NHH) - Department of Economics; IZA Institute of Labor Economics

Date Written: September 2006

Abstract

We analyze short and long-term effects of worker displacement. Our focus is on prime-age male workers displaced from Norwegian manufacturing plants. We find that displacement increases the probability of exiting the labor force by about 5 percentage points. This indicates that studies using data that do not incorporate workers leaving the labor force, may strongly underestimate the costs of displacement. The most productive workers are recalled, transferred to a different plant within the firm, or they move to the private sector. The least productive re-employed workers move to the public sector. Generally, the earnings effects are weak. When controlling for worker fixed effects, we find that all workers suffer some short-term losses, even those re-employed within the same firm, but the only workers that seem to suffer a permanent earnings loss are the few who move to the public sector.

Keywords: displaced workers, permanent job-loss, reemployment, matched employer-employee data, Norway

JEL Classification: J63, J65

Suggested Citation

Huttunen, Kristiina and Moen, Jarle and Salvanes, Kjell G., How Destructive is Creative Destruction? The Costs of Worker Displacement (September 2006). IZA Discussion Paper No. 2316. Available at SSRN: https://ssrn.com/abstract=936328

Kristiina Huttunen (Contact Author)

Uppsala University ( email )

Box 513
Uppsala, 751 20
Sweden

Jarle Moen

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Kjell G. Salvanes

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway
+47 5 595 9315 (Phone)
+47 5 595 9543 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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