A separate strand of the literature focuses on displaced workers and examines the consequences of layoffs on subsequent employment and wage outcomes. Kletzer and Fairlie (2003) analyze NLSY79 data and conclude that the wage disparity between displaced workers and their non-displaced counterparts persists through the five years following displacement. In general, the effect of displacement on workers can be explained by the loss of firm-specific human capital,<sup>5</sup> and most studies find that the effects of displacement are largest among older workers. For example, again using US data, Jacobson et al (2003) find that longer term adverse effects of displacement tend to be smaller for younger workers. Topel (1990) finds that wages among young displaced workers subsequently converge to the wages of their non-displaced counterparts. In the United Kingdom, Gregory and Jukes (2001) find that while risk of unemployment is lowest among prime age and the highest paid men, the wage penalty for experiencing unemployment is lowest among young men and the low paid, namely, those who have the least firm-specific human capital to lose.

A recent literature explores how, in the presence of asymmetric information, previous unemployment spells might act as a signaling device to reveal information on the quality of workers to future employers. For example, Gibbons and Katz (1991) develop a signaling model in which employers obtain information about the productivity of their workers based on previous experience in the labor market. They test their model using data on displaced workers from the United States. They find that selective lay offs that are not due to plants shut down contain information about workers’ productivity. These workers, in turn, suffer larger costs than workers who are displaced due to a plant closure. This signaling model is supported by data from Canada’s survey of displaced workers (Doiron 1995). In Italy, Lupi and Ordine (2002) find that the experience of unemployment in regions with high unemployment rates does not necessarily signal poor worker quality. As a result, unemployment spells in these regions have less adverse implications on future outcomes than in regions with low unemployment rates. This stigma or signaling effect seems to be highest among the most skilled workers, those who are least likely to experience unemployment. For example, Hyytinen and Rouvinen (2006), using data from the _European Community Household Panel_ , show that the adverse effect of temporary spells of unemployment and/or self employment—what they call “the stigma of failure”—is larger for more educated workers compared to the less educated workers.

Initial difficulties in employment experienced by young people may also have consequences outside the labor market. In particular, weak youth labor markets have been observed to delay other life transitions. In Europe, the average age when the youth leave their homes has steadily increased, especially in southern European countries. In Italy, 80 percent of males aged 18-30 still live with their parents, compared with 25 percent in the United States. Across OECD countries, the average age at marriage has increased while the average number of children per household has fallen. Deteriorating conditions in youth labor markets have at least a partial role in explaining these recent changes in life transitions. Youth tend to delay leaving their parents’ homes during

> 5 Becker (1975) seminal contribution to human capital literature makes the distinction between job specific and general human capital.

5