Aug. 25, 2017
SOURCE: David Wiczer – Federal Reserve Bank of St. Louis

Workers who lose their job face a variety of hardships while unemployed. But beyond the direct cost of job loss, its associated income loss, workers will tend to make less in their next job as well. This is perhaps not surprising intuitively and is certainly expected by economic theory. 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. 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. By either of these stories, unemployment duration should exacerbate the earnings losses. 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. Long unemployment durations also may signal failed attempts to find employment and be an even worse signal than a relatively short unemployment spell. A longer search time, however, may help the worker find a better match and a higher wage in re-employment. This article will explore empirically earnings losses across unemployment spells and show that, in general, the longer the unemployment duration, the larger the loss. 

To jointly measure earnings and unemployment spells, I use the Survey of Income and Program Participation (SIPP) from 1996 to 2012. This is a unique dataset because it is a high- frequency panel, meaning that it follows the same people for multiple periods and asks them for information relatively often. The respondents stay in the survey for up to four years and every four months give a monthly account of their earnings and labor-force status. This dataset is a powerful tool because it shows workers’ earnings exactly before they enter unemployment, the entire unemployment spell, and the wage when they emerge re-employed. I also observe a number of worker demographic and economic characteristics (age, gender, race, education, and occupation) and control for their average effect on earnings.