Job ladders and earnings of displaced workers

Abstract

Workers who suffer job displacement experience surprisingly large and persistent earnings losses. This paper proposes an explanation for this robust empirical puzzle in a model of search with a significant job ladder and increased separation rates for the recently hired. In addition to capturing the depth and persistence of displaced worker earnings losses, the model matches: employment- to-nonemployment and employer- to-employer probabilities by tenure; the empirical decomposition of earnings losses into reduced wages and employment; observed wage dispersion; and the distribution of wage changes around a nonemployment event.