The effect of labour market shocks on workers and the role of contract permanence

Abstract

Mass layoffs cause scars to affected workers' potential earnings path and job security. Past research on mass layoffs has mainly focused on the recovery of displaced workers. However, the rate of recovery depends on labour market frictions, which most likely do not affect industries similarly. Employment in high-permanence (HP) industries may be subject to different labour market frictions than in low-permanence (LP) industries, depending on factors such as workforce adjustment costs or skill transferability. To assess labour market frictions by permanence, I use annual data on a panel of employer-employee relationships for 1995-2014, provided by Statistics Norway. My results show that estimated expected earnings three years after the mass layoff event are higher than in the preceding year. The earnings growth is slower in LP industries. I also find a reduction in the expected number of days employed, and the reduction is larger in HP industries. I conclude that workers in HP industries have more a more robust expected earnings path, but that once displaced, they struggle more to return to the initial level of employment.