Research Seed Grant | 2008-2009

The Role of Mass-Layoffs in Trends in Instability and Inequality in the Labor Market

by Till Von Wachter

The early to mid 1980s was a period of important changes in the labor market in the U.S. and
many in European countries. In the U.S., wage inequality increased significantly, especially at the bottom of the wage distribution. The instability of wages increased in the early 1980s to then begin a secular decline from its peak until the mid 1990s. Similarly, transitions of workers into unemployment peaked in the early 1980s and have declined steadily until the late 1990s. While in the U.S. the aggregate unemployment rate fell steadily from its high level in the early 1980s, unemployment rates in many continental European countries have remained high. On the other hand, these countries did not experience increases in wage inequality or wage instability during that period. 

The early 1980s was also a period marked by exceptionally high rates of mass-layoffs. The 1982 recession was the strongest recession in the U.S. and in Europe since the great depression, and it coincided with continuing declines in manufacturing employment. It is well known that mass-layoffs can lead to persistent reductions in earnings and increases in unemployment. Similarly, mounting evidence seems to suggest that laid-off worker experience continuing job mobility and earnings instability.  As a result, it is likely that the high incidence of layoffs in the course of the 1982 recession has contributed to the persistent rise in earnings inequality, earnings instability, and in the instability of jobs and employment. However, despite the apparent high incidence and strong effects of layoffs, and its concurrence with strong labor market trends in the early to mid-1980s, this link is has not been explored in the literature. Yet, to understand how large-scale mass-layoffs – a recurring phenomenon in larger recessions – can affect the labor market for an extended period of time, establishing the importance of such a link in the data is crucial.
 
In this project, we analyze the incidence and persistent effects of mass-layoffs during the early 1980s on affected workers, and derive the consequences for the evolution of inequality and instability in the labor market. We use two large longitudinal administrative data sets from Pennsylvania and Germany spanning the period from 1975 to 1991 and from 1975 to 2005, respectively. The data are ideal for the project at hand, because they allow us to measure the incidence of mass-layoff using firm-level data for multiple years, and then follow the outcomes of affected workers for a long period of time. An important advantage is that the data sets are fairly comparable to each other.