Study: Earnings losses of displaced workers

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High-seniority employees who lost their job during the 1990s as a result of firm closures and mass layoffs suffered substantial losses in earnings, even five years after they were displaced, according to a new study.

The study found that, five years after being displaced, workers who lost their job through firm closures and mass layoffs experienced average earnings losses that represented at least 9% of their pre-displacement earnings. Losses incurred by workers with substantial seniority were more pronounced.

Five years after they lost a job, male workers who had at least five years of seniority and found another job experienced losses that represented between 18% and 28% of the earnings they received before their job loss.

For their female counterparts, the losses ranged between 24% and 26% of their pre-displacement earnings.

In 2000 dollars, the average loss in earnings for high-seniority males five years after losing their job varied between $7,100 and $10,900. The corresponding range for women was between $5,500 and $6,100.

The study examined the earnings trajectories of workers who lost their job in the private sector between 1988 and 1997 as a result of firm closures or mass layoffs, and who were aged 25 to 49 at the time.

In any given period, regular economic activity leads to resource reallocation resulting from technological changes, changes in trade patterns and consumer preferences, and numerous other factors.

While such resource reallocation is generally thought to have overall beneficial effects, leading to increased productivity and living standards, it can expose some workers to job losses.

Previous research from the United States has shown that job displacement due to mass layoffs leads to substantial earnings losses, especially among high-seniority workers. For many of these workers, job displacement implies earnings losses that persist several years after displacement.

This study examines for the first time whether this conclusion also holds in Canada.

The study showed that significant losses in earnings occurred among both high-seniority employees who were displaced from manufacturing firms, as well as their counterparts laid off from service-producing companies.

The study's findings also suggest that labour market conditions were a key determinant of the magnitude of the losses experienced by displaced workers.

Loss in earnings substantial and persistent

The study focused on workers involved in firm closures or mass layoffs that occurred in companies that had been operating for at least five years. Using this narrow definition of worker displacement, it estimated that, on average, 94,000 workers aged 25 to 49 were displaced each year during the 1988-to-1997 period.

This represents 1.3% of the 7.1 million workers in that age group who were employed in the private sector (on average) during that period.

Workers displaced through firm closures or mass layoffs suffered earnings losses that not only were substantial but also persisted several years after displacement.

In the year during which they were displaced, men and women in this age group suffered losses in earnings ranging between $5,500 and $6,900.

Five years after they were laid off, they had recovered some, but not all of these losses. At this point, their average losses varied between $2,300 and $4,800, representing between 9% and 21% of their pre-displacement earnings.

Among high-seniority displaced workers, the losses were more substantial.

In the year in which they lost their job, men and women with high seniority experienced a loss in earnings that ranged between $7,900 and $13,000. Five years later, these losses on average ranged between $5,500 and $10,900.

On average, 12,000 high-seniority male and female employees aged 25 to 49 were displaced each year through firm closures or mass layoffs between 1988 and 1997.

Earnings losses were widespread

High-seniority displaced workers from different industries and firms of diverse sizes suffered substantial earnings losses. However, losses in earnings did not vary widely by industry, at least for men.

For instance, average long-term earnings losses of high-seniority males displaced from manufacturing companies represented between 20% and 31% of their pre-displacement earnings.

Those experienced by their counterparts laid off from service-producing firms were very similar, both in absolute and relative terms. Their losses represented 17% to 30% of their earnings received prior to job loss.

Workers displaced from firms employing more than 100 workers had significant losses, as did their counterparts laid off from smaller companies.

High-seniority women displaced from the smaller firms incurred long-term losses representing about 26% of their pre-displacement earnings.

Those displaced from larger companies displayed long-term losses that represented 22% to 25% of pre-job-loss earnings.

Earnings losses varied with labour market conditions

Losses in earnings differed markedly depending on the period during which job losses occurred.

Workers displaced between 1987 and 1992 suffered much bigger losses in earnings than their counterparts who lost their job between 1993 and 1997. This was largely due to the recessionary period during the early 1990s.

Long-term earnings losses of high-seniority males who were displaced between 1987 and 1992 averaged roughly $11,300. This was almost twice the losses of about $6,100 incurred by men laid off between 1993 and 1997.

Similarly, long-term earnings losses of high-seniority females who were laid off between 1987 and 1992 averaged roughly $11,000. This was more than double the losses of about $5,100 suffered by their counterparts displaced between 1993 and 1997.

Employment opportunities were much better during the late 1990s than during the early 1990s, when the economy went through a recession. These results suggest that the degree to which workers' earnings recover after displacement is strongly influenced by labour market conditions.

The research paper "Earnings losses of displaced workers: Canadian evidence from a large administrative database on firm closures and mass layoffs" is now available as part of the Analytical Studies Branch Research Paper Series (11F0019MIE2007291, free) from the Publications module of our website.

Related studies from the Business and Labour Market Analysis Division can be found at Update on analytical studies (11-015-XIE, free) on our website.

For further information or to enquire about the concepts, methods or data quality of this release, contact René Morissette (613-951-3608), Xuelin Zhang (613-951-4295) or Marc Frenette (613-951-4228), Business and Labour Market Analysis Division.

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