Wage Scarring: The Wage Impact of Mass Layoffs, Evidence from the Global Financial Crisis

by Ian Hoefer Marti, Shuya Yang, Gianni La Cava and Matt Nolan

What was the impact of job displacement during the GFC on the average real wage earnings of displaced workers? Looking at the 2008/09 Financial year, we compare the wage earnings trajectories of long-tenure workers that lost their job in a mass layoff to those that didn’t. We find that:

  • average earnings were 27% ($15,000) lower after one year, and 10% ($5,000) lower after 10 years relative to other workers;
  • wage losses are mostly due to spending less time in work after being laid off rather than lower wages in these new jobs.
  • wage losses are larger than general estimates for Scandinavian countries, but smaller than the estimated losses for countries in Southern Europe.

The wage cost of job loss are large and persistent. Furthermore this research highlights the importance of being able to quickly find stable work in order to limit these scars.

However, knowing the right policies to limit the cost of job loss for workers involves understanding the mechanisms behind the wage scar. In future work we will investigate these scars further in two pieces of work – one that explores why there are wage scars from mass layoffs (i.e. loss of skills or finding a worse job), and another that shows who is most affected by wage scarring. Together these pieces will help inform policy makers about choices they could make to mitigate such wage scarring in the future.