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June 17, 2025

Moving down the jobs ladder

The role of jobless duration in understanding persistent earnings losses.

Tyler Smith

Source: monticello

It is well documented that workers displaced in layoffs experience persistent earnings losses. But it's not just losing a job that affects long-term earnings trajectories—it's how long the spell of unemployment lasts.

In a paper in the 蝌蚪网 Journal: Macroeconomics, authors , , , and found that workers who experience little or no joblessness after displacement suffer almost no earnings losses on average, while those who experience a prolonged period of joblessness experience large, persistent earnings losses and ultimately move to lower-paying firms.

The authors drew their conclusions from the Longitudinal Employer–Household Dynamics (LEHD) program, which covers 96 percent of private sector employment in the United States. They constructed a panel of linked employer–employee observations on the wage histories of workers from California, North Carolina, Oregon, Washington, and Wisconsin. By focusing on workers aged 25 to 55 with at least three years of job tenure before displacement, they ensured a sample of stable, attached workers rather than temporary or casual employees. 

Figure 1 from the authors’ paper tracks the average quarterly earnings of workers who lost their jobs during mass layoffs in 2005, following them for three years before and six years after displacement.

from Fallick et al. (2025)

The data are broken down by workers who regained employment in the same quarter as separation (green circle), in the quarter after separation (blue square), after one full quarter of nonemployment (maroon diamond), after two quarters of nonemployment (red triangle), after three quarters of nonemployment (orange x), and after more than four quarters of nonemployment (teal cross). The black line indicates workers who stayed in their jobs over the sample period.

The chart shows that workers fall cleanly into different earnings trajectories based on how quickly they found new employment. Workers who found new jobs within the same quarter as their layoff saw no earnings loss. Those who found work in the quarter after separation saw their income dip temporarily during the transition but then nearly recover.

In contrast, workers who remained unemployed for four or more quarters saw their earnings plummet and do not fully recover. The authors estimate that six years later, these workers were earning about $3,000 less per quarter—roughly $12,000 less per year—than similar workers who stayed employed. The reason that these workers’ earnings never recovered was because they ended up finding jobs at firms that tended to pay the lowest wages in their industry.

Overall, each additional quarter of unemployment resulted in deeper and more persistent earnings losses for workers. The authors suggest that future research should focus on the relationship between the duration of joblessness and movements down the job ladder to fully understand the losses from layoffs.