Research & Policy Briefs From the World Bank Malaysia Hub No. 33 May 7, 2020 Causes and Impacts of Job Displacements and Public Policy Responses Achim D. Schmillen Across the globe, both cyclical downturns and structural changes episodically eliminate substantial numbers of jobs and in the process create serious dislocations. For instance, the rise in joblessness because of the ongoing COVID-19 crisis is projected to be extraordinarily steep. As a response to job displacements, governments have implemented a range of measures to financially compensate displaced workers, assist them in finding reemployment, or both. The challenges should not be minimized: job losses have significant economic as well as social and psychological consequences; laid-off workers often lack the skills or geographic proximity to easily transfer to sectors that are growing; and providing adequate support can be expensive. Nonetheless, careful public policy responses can help mitigate the costs of job displacements and support workers in finding productive reemployment. Causes and Impacts of Job Displacements previously long job tenure. Research shows that many displaced workers have extended spells of unemployment and that once they Across the globe, both cyclical downturns and structural changes find reemployment, they tend to suffer significant and long-lasting related to shifts in trade patterns, consumer demand, technology, or earnings reductions. U.S. workers displaced from previously stable other causes have episodically eliminated substantial numbers of jobs employment relationships in the recession of 1982 suffered (Brand 2015). In the United States, roughly 10 percent of workers are immediate losses in annual earnings of 30 percent as compared to displaced from their job—that is, laid-off on economic grounds—over similar nondisplaced workers, von Wachter, Song, and Manchester a typical three-year period, Farber (2017) documents. Farber (2017) (2008) document. Even 15 to 20 years later, their average earnings further shows that the rate of job loss is procyclical, amounting to losses amounted to 15 to 20 percent of their earnings before they around 12 percent even in relatively mild recessions; during the global were displaced. Effects of a similar size have been documented for financial crisis of 2007 to 2009 it reached 16 percent. Early indications displaced workers in Germany (Schmieder, von Wachter, and Bender like an unprecedented increase in the number of weekly applications 2010; vom Berge and Schmillen 2015) (figure 2). In addition, the for unemployment insurance benefits in the United States from literature shows that job displacements have detrimental and durable 282,000 to 3,283,000 during the week ending March 21, 2020 and to effects on consumption (Browning and Crossley 2008); health and 6,867,000 the following week suggest that the job loss rate during the mortality (Browning and Heinesen 2012); fertility (Del Bono, Weber, ongoing COVID-19 crisis will likely be higher still (figure 1). As for and Winter-Ebmer 2012); and other outcome variables; and that the structural changes, there are concerns that breakthrough effects of job displacements are strongly procyclical (Davis and von technologies such as artificial intelligence and robotics will radically Wachter 2011). change the nature of work and dwarf previous waves of technological change in terms of labor market disruption (Chua, Loayza, and Going even further, large-scale job displacement may have Schmillen 2018). These forces and prospects make it imperative to significant impacts on entire communities. The emerging literature on understand the impacts of job displacements and the advantages and the size of such indirect effects has not yet reached a consensus: drawbacks of possible public policy responses. While vom Berge and Schmillen (2015) find no evidence of additional job losses for workers at establishments located in the vicinity of mass Over the past 25 years, a sizable literature, starting with Ruhm layoff events with average losses of around 200 to 300 jobs, (1991) and Jacobson, LaLonde, and Sullivan (1993), has documented Gathmann, Helm, and Schönberg (2019) argue that local spillover that job displacements have dramatic and long-lasting effects on the effects add further employment losses in case of larger mass layoffs employment, earnings, and income prospects of laid-off workers, with average direct losses closer to 2,000 jobs. Arguably, significant especially those in formal employment relationships and with community-wide indirect effects are to be expected only in the case of Figure 1. Weekly Initial Claims for Unemployment Insurance in the United States, Week of January 5 1980–Week of April 11 2020 8,000,000 7,000,000 Weekly initial claims for U.S. unemployment insurance 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Source: U.S. Employment and Training Administration. Note: Data are seasonally adjusted. Affiliation: Social Protection and Jobs Global Practice, the World Bank. e-mail address: aschmillen@worldbank.org Acknowledgement: The author thanks Amanina Abdur Rahman, Norman V. Loayza, and Philipp vom Berge for valuable insights, comments, and suggestions. Objective and disclaimer: Research & Policy Briefs synthesize existing research and data to shed light on a useful and interesting question for policy debate. Research & Policy Briefs carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions are entirely those of the authors. They do not necessarily represent the views of the World Bank Group, its Executive Directors, or the governments they represent. Causes and Impacts of Job Displacements and Public Policy Responses Figure 2. Earnings and Employment before and after Job Displacements in Germany, 2000–10 120 Annual earnings and days employed 115 110 (2008 = 100) 105 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 95 90 Job displacement 85 80 Annual earnings Annual days employed Source: vom Berge and Schmillen (2015), based on German administrative Social Security data. Note: The analysis comprises workers in stable jobs who were displaced in a mass layoff in 2009, compares them to a control group that did not experience a mass layoff, and controls for individual-specific time trends. particularly large-scale and geographically concentrated job performance of the program was relatively poor in terms of benefit displacements. This hypothesis is consistent with qualitative evidence coverage, adequacy, and leakage. At the same time, it reached a large that suggests that job displacements in Poland’s coal-mining industry number of displaced workers and there is evidence of some positive in the 1990s led to the economic decline of affected communities and labor market impacts (Betcherman and Blunch 2008). While beyond to various social problems including crime, alcohol and substance the scope of this Research & Policy Brief, certain place-based policies abuse, health problems, and the abandonment of housing (Haney and such as local economic development grants have also shown promise in Shkaratan 2003). mitigating community-wide impacts of large-scale job displacements. For instance, evaluations of the European Union’s regional policy show While much of the literature on the impacts of job displacements that such grants can have a long-term positive impact on a region’s has focused on developed economies, there is evidence that impacts economic growth, though their effects on employment tend to be less of job loss are also significant and long-lasting for workers in clear cut (Becker, Egger, and von Ehrlich 2010). developing countries—at least for workers in these countries’ formal sectors. China’s experience in the late 1990s and early 2000s is a case in point. During this time, tens of millions of workers were laid off as Temporary income support employment guarantees for employees of state-owned enterprises The first widespread approach generally used to support laid-off were removed. The sheer number of job displacements posed workers is temporary income support. There are three main tremendous economic and social challenges. Empirical analyses modalities for temporary income support to displaced workers: document that for laid-off workers rates of labor force withdrawal unemployment insurance, redundancy payments, and social were high and rates of formal sector reemployment were low. Many assistance programs. How these instruments are designed and displaced workers found work in the informal sector, which cushioned implemented has significant effects on the coverage and adequacy of some of the effects of the job displacement (Betcherman and Blunch income support and on workers’ incentive to look for jobs. 2008). An unemployment insurance system, if it exists, provides a first line More broadly, the existence of a large informal sector is a of support for laid-off workers in the formal sector. However, characteristic feature of labor markets in developing economies. unemployment insurance systems are usually designed as insurance While this poses myriad challenges, this sector can also act as a for relatively short-term, frictional spells of unemployment, not for countercyclical safety net in times of crisis (Loayza and Rigolini 2011; longer-term spells that are typical of job displacements caused by Colombo, Menna, and Tirelli 2019). Moreover, while direct evidence structural change or extraordinary circumstances like the ongoing of the impact of job losses on informal sector workers is largely COVID-19 crisis. Some countries have tried to improve the support missing, it can be conjectured that because uncertainty and churn are that unemployment insurance can offer in such situations. For usual features of work in this sector, the impact of losing any example, the unemployment insurance system in the United States particular informal “job” might be relatively muted—at least outside has an extended benefits feature that is triggered in times of high of extraordinary circumstances like the ongoing COVID-19 crisis, unemployment, whereas Canada ties benefit levels and duration to which threatens to hit informal workers particularly hard (Loayza and regional unemployment rates, so support is greater when and where Pennings 2020). joblessness is high. While unemployment insurance systems can offer extended income support to displaced workers, studies show that Public Policy Responses very long benefit periods can serve as a disincentive to search for work (Schmieder and von Wachter 2016). While the challenges of job displacements should not be minimized, careful public policy responses in the form of temporary income Redundancy payments can also provide income support for support and active labor market policies can mitigate the human and displaced workers in the formal sector. Depending on the design, they social costs and support displaced workers in finding productive can sometimes support these workers for a longer period than reemployment. In this context, international experiences—in terms of unemployment insurance. They can take the form of regular both successes and failures—can be informative. For instance, to redundancy payments that firms fund and pay out upon separation on mitigate the effects of tens of millions of job displacements in the late economic grounds or, in cases where large-scale layoffs occur, 1990s and early 2000s, China introduced a large-scale reemployment countries can set up special funds to dispense redundancy payments program that provided temporary income support and active labor to laid-off workers in the affected industry or region. The generosity of 2 market policies. As documented by Giles, Park, and Cai (2006), the redundancy payments varies considerably from country to country, Research & Policy Brief No.33 Figure 3. Regular Redundancy Pay for Tenure of 10 Years, Selected Countries 700 Redundancy pay for tenure of 10 years 600 500 400 300 200 (in days) 100 0 Portugal Cambodia India Austria Saint Lucia Argentina Germany Lesotho Sri Lanka Cyprus Malawi Ethiopia Netherlands Niger Antigua & Barbuda Rwanda Slovakia Tunisia Côte d'Ivoire Serbia Montenegro Senegal Australia Algeria Czech Republic Hungary North Macedonia Tanzania Tajikistan Burkina Faso South Africa Greece Thailand Egypt Iran, Islamic Rep. Zambia Luxembourg Turkmenistan Cameroon Slovenia Namibia Philippines Viet Nam Yemen Azerbaijan France Gabon Russian Federation Unit. Arab Emirates Indonesia Bangladesh Chile Jordan Turkey China Kazakhstan Mongolia Saudi Arabia Bulgaria Denmark Estonia Georgia Malaysia Spain Mexico Angola Nigeria Canada Afghanistan Madagascar Syrian Arab Rep. Morocco Low-income countries Middle-income countries High-income countries Source: International Labor Organization (ILO) EPLex database. Note: Redundancy pay expressed in daily wages. The latest year of available data is shown. depending on factors such as the general level of development, Active labor market policies employers’ legal and contractual right and obligations, and the strength of worker representatives in negotiations. Among The second widespread approach to support laid-off workers is to upper-middle income countries, the mean benefit level for an offer services, programs, and incentives that will encourage employee with 20 years of tenure is 7.5 times monthly wages, reemployment. Such active labor market policies regularly include Holzmann and Vodopivec (2011) find. Across the world, regular one or a combination of employment services (such as labor redundancy pay for a worker with 10 years of tenure ranges from zero exchanges or mobility assistance), education and training (such as to 20 times monthly wages, the EPLex database of the International classroom-based or on-the-job training), and business support or Labor Organization (ILO) shows (figure 3). subsidized employment (such as wage subsidies or community employment programs). Temporary income support and active labor Social assistance programs can provide a third line of support to market policies should be implemented not as substitutes for but as displaced workers. Social assistance programs are noncontributory complements to each other. interventions usually based on need, rather than being targeted according to a (prior) employment relationship. In most countries International experience suggests that the effectiveness of active with unemployment insurance systems, unemployment insurance labor market policies is mixed and that costs per beneficiary vary benefits and social assistance benefits are coordinated. For example, widely (table 1). Programs administered in the context of large-scale a worker may be eligible to receive social assistance benefits only job displacements during recessionary periods face particular when unemployment insurance benefits have been exhausted. In challenges because workers may be unable to easily transfer to other countries without an unemployment insurance system or with another sector or geographic area. They may lack appropriate skills, high rates of informality, a significant part of the income support to available jobs may be scarce, and/or moving to another region may be displaced workers will need to be provided through social assistance difficult. programs. This might also be the case in the ongoing COVID-19 crisis Properly designed and implemented active labor market policies due to the widespread dismissal of informal-sector workers. can nevertheless significantly increase the reemployment and Table 1. Evidence of Effectiveness and Costs of Active Labor Market Policies Impact on probability of employment Type of active labor market Typical direct costs policy per beneficiary Short- Medium- Long- term term term Employment services $15–$30 R R S (for labor exchanges) Education and training $250–$1,000 R RRR RRR (for institutional training) $700–$2,000 (for combined programs) Business support and $500–$3,000 S S R subsidized employment (for business support) $300–2,400 (for community (for subsidized employment) employment programs) Source: Cunningham and Schmillen (forthcoming) based on Card et al. (2017) and other research cited therein. Note: S denotes an impact on the probability of employment of less than 0.05 standard deviations, R an impact of 0.05 to 0.1 standard deviations, and RRR an impact of at least 0.1 standard deviations, all according to the meta-analysis by Card et al. Employment services include labor exchanges, vocational counseling, and mobility assistance. Education and training include institutional training, on-the-job training, and combined programs. Business support and subsidized employment include small business support, wage subsidies, and community employment programs. 3 Causes and Impacts of Job Displacements and Public Policy Responses earnings prospects for laid-off workers. The evaluation literature has policies can help mitigate the employment impacts of the crisis (World identified key features of active labor market policies that are Bank 2020). Critical complementary policies will include measures to associated with positive impacts and cost effectiveness (Card, Kluve, ensure that displaced workers and their families have continued and Weber 2017). Employment services can be very cost effective, but access to health and care services. they are of limited use where labor demand is weak. Education and training have high direct and opportunity costs, but may be necessary How will public policy responses to help mitigate the costs of job for many displaced workers given their mismatched skills for emerging displacements need to be adjusted during the COVID-19 crisis? While jobs. They can yield significant returns if accompanied by strong a precise and complete response to this question would depend on employer involvement to match education and training with market the country context and is therefore beyond the scope of this Brief, it needs; in the State of Washington in the U.S. the equivalent of one helps to distinguish between relief measures and recovery measures year of community college education raises displaced workers’ (Loayza and Pennings 2020). earnings by 9 percent for older men and 10 percent for older women, During the COVID-19 crisis, short-term relief measures related to Jacobsen, LaLonde, and Sullivan (2005) report. Wage subsidies have job displacements would necessarily need to focus on the provision of been found to increase employment rates for eligible workers, but income support, in addition to policies that aim to prevent mass targeting and design are important to avoid displacing other layoffs from happening in the first place. Short-term work (ineligible) workers. Community employment programs may be an schemes—in which workers agree to or are forced to accept a effective way to provide temporary income support to displaced temporary reduction in work hours and pay, and the government workers, but rarely enhance participants’ future employability. bridges some of the resulting income gap—could form an important Two active labor market policies that may be particularly element of the public policy response during the ongoing crisis. While promising for some workers in the context of large-scale job these schemes cannot successfully mitigate the impacts of permanent displacements with limited local job opportunities are shifts in labor demand, they have been successfully used in Austria self-employment assistance and relocation incentives. The former can and Germany to protect jobs when there was a temporary lack of include access to both credit and technical assistance for potential labor demand (Balleer et al. 2016). Medium-term recovery measures entrepreneurs and microenterprises. The latter can be a useful could be comprised of a more standard mix of income support and instrument when labor markets are stagnant and opportunities exist active labor market policies. elsewhere in the country or across the globe (World Bank 2018). Suitable targeting and statistical and case profiling is essential for any Two additional considerations can inform public policy responses strategy involving active labor market policies (IFC 2005). Not all to help mitigate the costs of job displacements during the COVID-19 workers will be able to invest in new skills, search for jobs in new crisis. First, during the crisis, temporary income support and active sectors, or move to a new location. But if appropriately targeted, labor market policies need to be designed in an inclusive way that many will be able to do at least one of these things. broadens eligibility beyond workers in formal jobs—particularly in developing countries, where an overwhelming share of poor and Conclusion vulnerable workers are employed informally. This means a significant part of income support measures will need to be financed through The ongoing COVID-19 crisis might lead to an unprecedented rise in general government revenue. Second, all interventions will need to be the rate of job displacements, exacerbating the challenges outlined in implemented in accordance with public health and social distancing this Brief. For policy makers considering how to manage this situation, requirements. 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