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Report examines impact of mass layoffs on workers' long-term earnings

by David Bauman - June 8, 2009


For workers losing jobs due to mass layoffs in the current economic downturn, the bad news is that more people than ever are looking for work right now, making it the toughest job market in at least two decades.

But for those lucky enough to find another job, there is more bad news: they will likely suffer lower wages for many years compared to similar workers who are not laid off.

A new study from UConn and the Connecticut Department of Labor shows how the business cycle plays a determining role in the extent of wage losses for workers let go in mass layoffs and plant closings.

The study finds that for workers losing jobs during a recession, the damage to their earnings can linger for years. By contrast, for workers who lose jobs as part of a mass layoff or plant closure in more favorable times, long-term earnings losses are negligible.

Kenneth Couch, an associate professor of economics in the College of Liberal Arts and Sciences, teamed up with researchers at the Connecticut Department of Labor, economist Nicholas Jolly and analyst Dana Placzek, for the study.

They examined wage records from unemployment insurance data collected by the labor department to track what happens to workers who experience a mass layoff during a period of sustained economic growth compared with a recession.

Their study, entitled “Mass Layoffs and Their Impact on Earnings During Recessions and Expansions,” used information spanning 12 years, 1993 to 2004. During that period, the state experienced a full employment cycle, consisting of a period of growth and a period of recession.

Using two data samples, one of individuals who changed jobs during a period of economic growth, the other of workers who changed jobs during an economic downturn, the study examined the experiences of both groups after being laid off.

“This is the first study to compare directly the experiences of workers displaced due to mass layoffs at different points in the business cycle,” says Couch, lead author of the study.

“What it shows is that if workers who have held a job for at least three years lose that job during a recession, they still have earnings losses of 20 percent or more six years afterwards,” he says.

“Earnings losses among those displaced in periods of economic growth, on the other hand, have negligible earnings losses six years later.”

The pattern occurred regardless of the gender or age of the workers and the size of the firm.

Kenneth Couch, associate professor of economics.
Kenneth Couch, associate professor of economics. Photo by Peter Morenus

In addition, the state of the business cycle appears to have a disproportionately large impact on workers who change industries following job loss, those who suffer multiple layoffs, and those who receive unemployment insurance.

The study shows that each of these groups experiences large earnings losses that increase during economic downturns.

For displaced non-manufacturing workers, earnings losses are significantly greater if they find re-employment by switching industries, regardless of economic conditions.

“The results of this study re-affirm our belief that it is of vital importance to provide workforce services to individuals who experience a mass layoff during an economic recession,” says Patricia Mayfield, Connecticut Commissioner of Labor.

“The results clearly indicate that re-employment efforts should be focused on getting displaced workers back into positions that offer job opportunities for a longer period of time, rather than short-term employment.

“The study also suggests that whenever possible, we should help these workers find jobs within the industry from which they were laid off,” she adds, “to ensure better long-term success in the workforce.”

Couch says the study’s findings underscore the importance of directing assistance to workers experiencing mass layoffs in difficult economic times.

He notes that over six years the earnings loss for workers let go in a mass layoff during good economic times averages 7.2 percent.

However, if the job loss comes during a recession, the earnings loss over the six years could amount to 18.2 percent. For workers making $40,000 a year, for example, that would mean earning nearly $45,000 less over the six year period.

The impact on wages could be even more severe during conditions like those currently prevailing, Couch says.

That’s because of the depth of this recession and the possibility that the unemployment rate may approach 10 percent, a level not seen since the 1980s. The labor department recently reported that the unemployment rate rose to 8.9 percent in April.

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