Abstract:
How people insure against costly layoffs is crucial for understanding the economic cost of labor market shocks and the role of public insurance. However, empirical research has stopped short due to challenges in identifying the causal impacts of layoff on income available for con- sumption and assets available to smooth income fluctuations. Moreover, selective out-migration from firms pending a workforce restructuring can mask important self-insurance from job search. This paper breaks new ground by combining administrative records tracking job changes, wealth, and income with quasi-experimental variation in firm closures in Norway. The key to our em- pirical approach is that bankruptcy judges are randomly assigned and vary in how often they liquidate the firm. Using judge leniency as an instrument for layoff, we estimate that layoff causes a five-year average earnings decline of 25%. Importantly, the tax and transfer system offsets 45% of the earnings costs to disposable income, and asset decumulation lowers the consumption ex- penditure pass-through to 20%. We then show that layoff costs are concentrated in weak labor markets and that job mobility appears to be an effective insurance against layoffs in strong labor markets. Motivated by these findings, we develop a model where people make precautionary sav- ings and costly job search decisions while facing idiosyncratic layoff risk. We estimate the model and use it to quantify employees’ willingness to pay (WTP) to keep their job. The WTP exceeds the expected income loss reflecting the search efforts of recovering from layoff. Our model highlights that on-the-job search substitutes with unemployment insurance and plays a key role in shaping the welfare costs of layoff.
Link to the paper [Dropbox-link].
The seminar will be held in room 1249 (12th floor) at Eilert Sundts Hus. The address is Moltke Moes vei 31.