Standard approach to measuring impact of job loss on earnings overstates long-term earnings losses, says Cleveland Fed economist

Economists have documented that losing a job can lead to large and long-lasting reductions in a person’s lifetime earnings and wages. However, these long-term losses may have been overstated, says Federal Reserve Bank of Cleveland economist Pawel Krolikowski, who proposes an alternative approach to measuring the impact of job loss on future earnings.

According to Krolikowski, the standard approach used to estimate changes in earnings after a job loss has been to compare the lifetime earnings of workers who lose their jobs with the lifetime earnings of a “control group” of workers who never lose their jobs. Krolikowski says his analysis “documents a systematic tendency for the standard approach to dramatically overstate the earnings losses following displacement.”

Krolikowski proposes an alternative approach that uses a control group of individuals who, instead of never losing a job over their lifetime, do not lose a job in the year of interest. Individuals who are displaced in future periods are still included.

Comparing the estimates of earnings losses from the two approaches, Krolikowski finds that, on impact, the standard and alternative approaches yield comparable estimates of earnings losses: around 30 percent. But he says the recovery is strikingly different for the two specifications. “The alternative approach suggests a 20 percentage point earnings recovery in the 10 years following displacement, with the earnings losses indistinguishable from zero eight years after the job loss. In contrast, the standard approach suggests that earnings remain permanently lower after displacement, showing almost no recovery even 10 years following the displacement event.”

“The not-displaced-today approach depicts a healthy recovery in earnings in the decade following displacement, whereas the never-displaced approach suggests a permanent decline in earnings,” says the researcher.

Read Measuring the True Impact of Job Loss on Future Earnings

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479