The Echo of Job Displacement

Abstract

In this paper we examine the long-term effects of job displacement due to establishment closures in Sweden on labor market status. Using linked employeremployee data we are able to identify all employees displaced in 1987 and follow them until 1999. The displaced employees are compared to a large random sample of non-displaced employees by using a difference–in–difference matching estimator. We find a rapid and almost total recovery of those displaced in 1987 compared to the control group up to 1990, both with respect to employment and unemployment. However, with the advent of the deep recession in 1990, the two groups again diverge and by the end of the century, the echo of the job loss 13 years earlier had still not subsided. We attribute the longer-term effects to recurrent displacements. Among the various possible explanations of this phenomenon, we focus on short tenure on subsequent jobs which makes the previously displaced vulnerable to further adverse shocks. We cannot precisely identify the significance of short tenure for recurrent displacement but loss of job specific capital or seniority lay-offs rules are the prime candidates.