Involuntary job loss: welfare effects, earnings impacts and policy options

Abstract

Workers who experience involuntary job loss suffer from deep and persistent negative consequences. In this paper, we first summarise the evidence on the effects of involuntary job loss on displaced workers’ wellbeing. We conclude that displacement harms workers’ mental health and economic security in the short term and negatively affects their earnings and mortality risk in the long term. We then extrapolate the estimates of Hyslop and Townsend (2017) to estimate the economy-wide net-present value of wages lost as a result of displacement by the workers displaced in New Zealand in a representative year. Our estimates suggest that this value is likely between $3.3 billion (in a year of economic upswing) and $15.4 billion (in a year of very severe economic downswing). Finally, we survey the policy options available for dealing with involuntary displacement. We conclude that unemployment insurance or unemployment benefits can effectively mitigate the immediate negative effects of displacement and have only small downsides. By contrast, training and job placement programs are typically ineffective, but in some circumstances might have high potential upside.