Dont Look Down: New Evidence on Job Loss in a Flexible Labour Market

We estimate the earnings, hours and income effects of job loss (displacement) for a representative sample of UK workers from 1991--2007. We are able to follow workers before and after displacement regardless of their labour market state, and we are able to precisely match displaced workers with observably similar non-displaced workers. We show that job loss is associated with a long-run reduction in income which is mainly due to reductions in monthly pay conditional on employment rather than in employment propensity. Entry into unemployment is very short-lived, and while there is some entry into other labour market states, this does little to compensate for income losses. Total income from welfare payments, including unemployment insurance, retirement income and invalidity benefit reduces losses by only 15% in the first 12 months after job loss, and become even less important as time passes. The lack of a “safety net” means that job loss in the UK has a similar effect to job loss in the US.