Determinants of earnings losses of displaced workers

Abstract

Using an unusually rich matched employer-employee data set for Portugal, we studied the persistent earnings losses of workers displaced due to firm closure, collective dismissals and individual dismissals. We found that those losses are rather severe and persistent, representing around 50 percent of the pre-displacement wages, six years after the separation event. Those losses are largely explained by the joblessness experience of the displaced workers. We explored the sources of those losses, estimating a three-way high-dimensional fixed effects regression model, which enabled us to obtain worker, firm, and job title fixed effects. We found that the allocation into lower-paid job titles accounts for half of the total average wage loss. Sorting into firms also plays a significant role to explain the wage loss of displaced workers.