For Workers Laid Off in Recessions, Big Pay Gaps Persist for Decades

For Workers Laid Off in Recessions, Big Pay Gaps Persist for Decades
For Workers Laid Off in Recessions, Big Pay Gaps Persist for Decades

A new study finds when men lose their jobs during a recession and find new ones at lower salaries, the resulting pay gap lasts for decades.

Co-authors Steve Davis of the University of Chicago and Till von Wachter of Columbia University found that when mass layoffs happen in a recession, men with three or more years of job tenure continue to earn lower salaries for 15 to 20 years after the initial job loss. They lose an average of about $112,000 in future lifetime earnings -- or about 19% -- relative to peers who hang on to their jobs.

Guys who get a pink slip in a mass layoff during good economic times stay behind the curve too, but they lose just $65,000 in lifetime earnings, a decline of 10%, though lower salaries can persist a decade or more.

"What's novel about the paper is how sensitive the long-term earnings losses are to the labor market conditions at the time you lose your job," says Davis. "People who lose jobs in weak labor markets do much worse on average over the next 20 years and obviously that's quite relevant as to what happened in last two to three years, where huge numbers of people have lost their jobs."

'A Substantial Resetting of Wages'

The researchers found that earnings losses associated with job displacement are large and persistent for both women and men. But the study initially focused on men, because the data extends back to the early 1980s, when women were more likely to provide a secondary wage for the household.

"In earlier decades, men were the primary earners and women were much more likely to move in and out of labor force because of child care and other reasons," says Davis. "The employment and career paths of men and women have converged to considerable extent since then, especially among more educated men and women." The researchers will add data on women in a revised version of the paper before it is published in the Brookings Papers on Economic Activities.

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"A recession leads to a substantial resetting of wages of displaced workers -- and the duration of these losses is quite persistent," says von Wachter.

The researchers followed individual workers over a 30-year period by examining Social Security records. They defined a "mass layoff" as one in which a firm with 50 or more employees prior to the event experiences a lasting employment decline of at least 30% over two years.

"We wanted to isolate firms that were in distress," says von Wachter, in order to examine a population of laid-off workers forced to find a new job, versus people who left their jobs voluntarily and on good terms.

A Host of Reasons for the Gap

Why is the pay gap so persistent? "In a recession, some people were working jobs that are no longer available, and [their] skills were specific to the prior job," von Wachter explains. "It may not be possible for everyone to reinvest in their skills to make up for these losses."

In addition, some workers in the group studied may have enjoyed above-average salaries, as they had been in their jobs for a number of years and worked at relatively large companies. "That [situation] may be hard to find again in a slack labor market, so their pay may revert back to the mean," von Wachter suggests.

Moreover, overall wages decline during recessions. "You are going to find that new job in circumstances when entry-level jobs are likely to be paying lower wages," von Wachter says. "Thereby wages for those starting a job in a recession are reset at lower level, and not everyone is active and mobile and moves up to a better trajectory. Their new career track may be set at a lower level." The effect is similar to persistently lower wages that plague college students who have the misfortune to graduate during a recession.

In fact, younger men bear the brunt of job destruction during an economic downturn, the researchers found. "In a recession younger men tend to do comparatively worse in that their earnings losses are larger in terms of a life-cycle context," von Wachter explains. "Older men always have larger costs from job displacement, but young workers' losses increase in recessions and are added up over more years."

The Bureau of Labor Statistics reports that only 49% of workers displaced between 2007 and 2009 who had three or more years of prior job tenure are currently employed. Among those who found a job, 36% report their current earnings are at least 20% lower than they made in their previous one.

Those pay gaps are likely to endure for decades, von Wachter predicts: "During the last big recession in 1980, we saw a similar burst of job destruction, but a much faster recovery -- so that was better-case scenario relative to what we are in right now."