JOB DISPLACEMENT AND THE INTER-TEMPORAL MOVEMENT OF WORKERS THROUGH THE EARNINGS AND INCOME DISTRIBUTIONS

I. INTRODUCTION Researchers and policy makers are aware of the negative, long-term effects job displacement has on workers' earnings (Couch and Placzek 2010; Jacobson, LaLonde, and Sullivan 1993a, 1993b; Ruhm 1991; Stevens 1997). One area that has received little attention is how this type of job loss influences the inter-temporal movement of workers through the earnings and income distributions. Studying displacement's effect on mobility is important because movements within the income distribution have implications for policies designed to combat inequality. Displacement may raise the probability of increased income inequality and hinder relative mobility because this type of job loss significantly reduces workers' earnings relative to non-displaced individuals. (1) Berry, Gottschalk, and Wissoker (1988) and Stevens (2001) find the transitory variance of displaced workers' earnings increases upon job loss, and this variance shows an increasing trend over time (Stevens 2001). The increased volatility of displaced workers' earnings is naturally a policy concern, but the more relevant question is whether short-term volatility is permanent or offset by long-term upward mobility as earnings of displaced workers recover. Little empirical research exists on displacement and mobility (Berry, Gottschalk, and Wissoker 1988; DiPrete 2002). Using an errors components model and the Panel Study of Income Dynamics (PSID), Berry, Gottschalk, and Wissoker (1988) find the probability of displaced workers earning less than $10,000 in a given year increases the year after job loss occurs. DiPrete (2002) finds the probability of a U.S. household experiencing a displacement and entering poverty is between 0.035 and 0.05. In his study, poverty is defined as being less than 50% of the median-adjusted household disposable income, adjusted for family size. Finally, Gittleman and Joyce (1999) use the PSID and probit models to investigate how voluntary and involuntary job separations occurring over a 5-year period affect mobility. Their definition of involuntary job loss includes not only displacement, but also job was completed, temporary work, and seasonal occupation. The authors find involuntary job loss reduces the probability of moving from the bottom quintile of the income distribution by 5 percentage points. Involuntary separations also reduce the probability of staying in the top quintile by 20 points. This paper uses the 1968-1993 waves of the PSID to analyze how job displacement influences workers' inter-temporal movements throughout the earnings and income distributions. This study contributes to the existing literature by analyzing three different measures of financial well-being: annual labor earnings; the combined earnings of the married or cohabiting couple; and pre-tax, post-transfer total family income. Previous papers only examined these measures separately. Berry, Gottschalk, and Wissoker (1988) used annual labor earnings; DiPrete (2002) analyzed size-adjusted household disposable income; and Gittleman and Joyce (1999) focused on size-adjusted family income. It is important for any study of displacement and mobility to consider these various measures of financial well-being in a unifying framework. Labor earnings are the reward an individual receives for participating in the workforce. Displacement directly alters this reward by possibly reducing hours worked, causing spells of unemployment, and destroying firm/industry-specific human capital. The added worker effect indicates that the labor supply (and, therefore, earnings) of wives of displaced husbands should increase upon job loss, which should serve to mitigate displacement's negative impact. In fact, Stephens (2002) shows that this increased labor supply compensates for over 25% of lost income. Finally, some government transfer programs, such as unemployment insurance, are designed to serve as a buffer against negative income shocks like job displacement. …