Saturday, March 17, 2012

17/3/2012: Long-term impact of unemployment - US study, Irish implications

An interesting study by Steven Davis and Til Wachter titled "Recessions and the cost of job loss"published by Becker Friedman Institute for Research in Economics Working Paper No. 2011-009 aims to quantify some of the effects of jobs displacement in the recession on cumulative losses in earnings. The study uses microdata from Social Security records for US workers from 1974 to 2008. 

Some findings:

  • In present value terms, men lose an average of 1.4 years of re-displacement earnings if displaced in mass layoff events that occur when the US unemployment rate is below 6 percent. 
  • Men lose double that - 2.8 years - of pre-displacement earnings if they lose their job when the unemployment rate exceeds 8 percent. 
  • To add to authors conclusions: if you think of it in terms of the life-time losses, this is equivalent to roughly 14% loss in life-time earnings. Now, if you put this into a retirement perspective - this amounts to roughly 1/3 of an average funded retirement stream of earnings.
  • Some more granularity on the study results: "For men with 3 or more years of prior tenure who lose jobs in mass-layoff events at larger firms, job displacement reduces the present value of future earnings by 12 percent in an average year. The present value losses are high in all years, but they rise steeply with the unemployment rate in the year of displacement. Present value losses for displacements that occur in recessions are nearly twice as large as for displacements in [economic] expansions. The entire future path of earnings losses is much higher for displacements that occur in recessions. In short, the present value earnings losses associated with job displacement are very large, and they are highly sensitive to labor market conditions at the time of displacement."
  • The study also finds "large cyclical movements in the incidence of job loss and job displacement and present evidence on how worker anxieties about job loss, wage cuts and job opportunities respond to contemporaneous economic conditions". 
  • More specifically on the above point: "Drawing on data from the General Social Survey and Gallup polling, we examine the relationship of anxieties about job loss, wage cuts, ease of job finding and other labor market prospects to actual labor market conditions. The available evidence indicates that cyclical fluctuations in worker perceptions and anxieties track actual labor market conditions rather closely, and that they respond quickly to deteriorations in the economic outlook. Gallup data, in particular, show a tremendous increase in worker anxieties about labor market prospects after the peak of the financial crisis in 2008 and 2009. They also show a recent return to the same high levels of anxiety. These data suggest that fears about job loss and other negative labor market outcomes are themselves a significant and costly aspect of economic downturns for a broad segment of the population. These findings also imply that workers are well aware of and concerned about the costly nature of job loss, especially in recessions."
While re-parameterizing the US labour market experience as revealed in the study into that in Ireland is not possible, the above results very clearly point to the extremely significant implications of the current unemployment in Ireland on expected future life-time earnings of a large proportion of our population. In Ireland, we have not even began assessing the impact that current unemployment crisis will have on:

  • future economic growth (via earnings-savings-investment and earnings-consumption links which imply that previous unemployment-related reduction in life-time earnings will have significant, potentially double-digit-sized adverse drag on savings, investment and consumption levels, let alone growth rates, into the future) 
  • fiscal revenues in the future (via earnings-tax revenues links which imply reduced tax revenues levels from consumption, investment and income taxes into the future) 
  • retirement funding and demand for public health and pensions (via earnings-savings-investment links which imply reduced funding for retirement and private health)
  • education funding for children (via reduced earnings of parent impact on children education) and
  • the links between current debt levels, property markets, future investment and economic activity.
Neither do the above results cover the Irish-specific case of household wealth destruction and debt overhang accompanying the stratospheric rise of unemployment.
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