Laid-off workers tend to earn less at their new jobs than their old ones. A recent Economic Synopses essay explored the reasons for this and whether the reduction in earnings worsens the longer a worker remains unemployed.
The fact that many unemployed workers end up in lower-paying jobs conforms to economic theory, according to economist David Wiczer.
“Coming from unemployment, a worker is not in a good position to select their optimal job nor to bargain for high wages once they find a job,” he wrote. “In addition, unemployment may signal—rightfully or not—that a worker was separated for a reason and is less productive than their prior wage required.”
As the bout of joblessness becomes longer, the challenge becomes greater, according to the author.
“A worker unemployed longer will be more desperate to take a bad job that comes along and have an even worse bargaining position in it,” he wrote. “Long unemployment durations also may signal failed attempts to find employment and be an even worse signal than a relatively short unemployment spell.”
To study the effects of unemployment, Wiczer analyzed Survey of Income and Program Participation (SIPP) data from 1996 to 2012. This dataset follows specific individuals for up to four years. During that time, the participants are surveyed about their earnings and labor force status every four months. This provides a picture of workers’ earnings before unemployment, during unemployment and once hired again.
His statistical analysis showed that earnings losses grew fairly consistently with the duration of joblessness.
“For those unemployed one month, their losses are approximately zero on average,” he wrote. “For those unemployed a year, their next job pays about one-sixth less than their previous one.”
(For more on his statistical analysis and the accompanying figures, see his essay “Earnings Losses through Unemployment and Unemployment Duration.”)