Abstract

AbstractUsing survey data from the German Socio‐Economic Panel (SOEP), this paper analyses the extent to which alternative income sources, reactions within the household context, and redistribution by the state attenuate earnings losses after job displacement. Applying propensity score matching and fixed effects estimations, we find that income from self‐employment reduces the earnings gap only slightly and severance payments buffer losses in the short run. On the household level, we find little evidence for an added worker effect whereas redistribution by the state within the tax and transfer system mitigates income losses substantially.

Highlights

  • It is often stressed in the economic literature that reallocation – both among continuing firms and through firm entry and exit – is an important driver of productivity growth and beneficial for an economy as a whole

  • Starting with individual labour earnings without severance payments and without income from self-employment – the type of income contained in German administrative data – we find that displaced workers suffer a severe earnings loss of around 12,900 € in the first year after displacement compared to their non-displaced counterparts which corresponds to a percentage loss of around 40 per cent

  • Using household survey data from the German Socio-Economic Panel (SOEP) we have investigated the impact of job displacement on individual and household income of affected workers and their families

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Summary

Introduction

It is often stressed in the economic literature that reallocation – both among continuing firms and through firm entry and exit – is an important driver of productivity growth (see e.g. Syverson 2011) and beneficial for an economy as a whole. Our paper contributes to the literature by investigating to what extent alternative income sources, reactions within the household context, and redistribution by the state buffer earnings losses after job displacement, highlighting the relative importance of each channel. Previous studies on self-employment entry after job loss did not investigate to what extent income from self-employment attenuates earnings losses after job displacement and we are – to the best of our knowledge – the first to analyse the buffering function of this alternative income source. This is interesting since social security data that are often.

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Data and descriptive evidence
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