Abstract
Abstract This article identifies an equilibrium theory of wage formation and endogenous quit turnover in a labour market with on-the-job search, where risk averse workers accumulate human capital through learning-by-doing and lose skills while unemployed. Optimal contracting implies the wage paid increases with experience and tenure. Indirect inference using German data determines the deep parameters of the model. The estimated model not only reproduces the large and persistent fall in wages and earnings following job loss, a new structural decomposition finds foregone human capital accumulation (while unemployed) is the worker’s major cost of job loss.
Highlights
Following Topel (1990) and Ruhm (1991) an important reduced form literature quantifies the surprisingly large and persistent earnings losses that follow layoff—the cost of job loss
Because the equilibrium market structure is consistent with the Jacobson et al (1993) statistical approach, we use it to decompose the estimated cost of job loss into three constituent parts: (i) job ladder losses, (ii) human capital losses, and (iii) employment gap effects
This article has generalized the equilibrium framework of Burdett and Coles (2003) to the case of learning-by-doing while employed, human capital loss while unemployed and to a “timeless equilibrium” which allows for growth
Summary
Following Topel (1990) and Ruhm (1991) an important reduced form literature quantifies the surprisingly large and persistent earnings losses that follow layoff—the cost of job loss. The estimates of Jacobson et al (1993) and Couch and Placzek (2010) suggest that, six years after displacement, worker losses are between 13% and 25% of their pre-displacement earnings. Because the equilibrium market structure is consistent with the Jacobson et al (1993) statistical approach, we use it to decompose the estimated cost of job loss into three constituent parts: (i) job ladder losses, (ii) human capital losses, and (iii) employment gap effects (the laid-off worker is more likely to be unemployed in the future with zero earnings). Using German data and consistent with the large earnings losses described above, the estimated cost of being laid-off is
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