Abstract
Using survey data from the German Socio-Economic Panel (SOEP) this paper analyses to what extent 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 high individual earnings losses after job displacement and only limited convergence. Income from self-employment slightly reduces the earnings gap and severance payments buffer losses in the short run. On the household level, we find substantial and rather persistent losses in per capita labour income. We do not find that increased labour supply by other household members contributes to the compensation of the income losses. Most importantly, our results show that redistribution within the tax and transfer system substantially mitigates income losses of displaced workers both in the short and the long run whereas other channels contribute only little.
Highlights
It is often stressed that reallocation — both among continuing firms and through firm entry and exit — is an important driver of productivity growth and beneficial for the 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 approximately 10,100 Euros in the first year after displacement compared with their non-displaced counterparts, which corresponds to a percentage loss of approximately 26 per cent
We find that the added worker effect is driven by spouses with young children, which is overall in line with the results by Halla et al (2018)
Summary
It is often stressed 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 the economy as a whole. From the affected workers’ point of view, these reallocation processes generate ‘winners’ and ‘losers’, the latter being those who suffer from involuntary job losses due to firm exits or mass layoffs that come along with reallocation and structural change. The importance of this issue is well reflected both in public policy debates and in the academic literature.
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