Workers: A bigger toll on the unskilled

t he i mp AC t on w orkers, Firms, A nd p l AC es 53

firms, defined as those that face less competition, is less affected by crises than is employment in less-protected firms. In sectors where a few firms hold a large percentage of the market, shocks do not lead to any downward real wage adjustments. Instead, they can lead to increases in employment, the opposite of what normal economic mechanisms would bring about. By the same logic, employment responds less to negative export shocks in state-owned firms than in private-owned firms.

The chapter closes by considering the third piece of the triangle, places. Findings indicate that workers in less formal localities cope better in the wake of crises than workers from other localities. The presence of a large informal sector may protect some workers against shocks. For instance, this study finds smaller employment and wage losses in response to crises for formal, private sector workers who live in localities with higher rates of informality (Fernandes and Silva 2021). This finding suggests that informality can be an important buffer for employment in the medium to long run, when workers may transition from unemployment to informality; such an effect was shown by Dix-Carneiro and Kovak (2019) in the case of adjustment to trade liberalization. Indeed, transitions from unemployment to informality are two times more likely in the Brazilian data than transitions from unemployment to formality.

Finally, findings indicate that workers in localities with more (alternative) job opportunities bounce back better from crises. Losses in employment (and sometimes wages) for formal workers are larger and longer-lasting in localities with larger primary sectors, smaller service sectors, fewer large firms, and production highly concentrated in the same sector where the workers were employed before the crisis (Fernandes and Silva 2021). In such cases, these workers’ persistent losses of earnings may reflect the lack of opportunities for them in the rebound, not just scarring in the traditional sense of a persistent loss of human capital associated with a period of unemployment or lower-quality employment.

The goal of this section is to improve understanding of the long-term implications of crises for workers in the LAC region. A primary focus of the chapter is characterizing the incidence and magnitude of labor scarring in the region. Scarring refers to the long-run effects of job loss on a worker’s earnings through the decay of the worker’s human capital and changes in the worker’s quality of employment. Since the lasting wage effects of job losses were first documented in the United States by Jacobson, LaLonde, and Sullivan (1993a, 1993b), studies from around the world have found that the wage effects of losing a job are long-lasting. Decay of human capital and reallocation of workers and firms across sectors are two important channels through which crises can have long-term implications on the welfare and economic growth prospects of the LAC region.

This section answers two sets of questions. First, how extensive is scarring in Latin America and the Caribbean, and what forms does it take? The section looks at scarring across three dimensions that can cause it: job loss, worse initial conditions at workforce entry, and crisis-driven adjustment. And second, how does scarring vary across different types of workers?

Scarring implies a reduction in human capital and worker productivity, leading to worse employment outcomes and lower wages over time. Human capital can be thought of as taking two forms. General human capital includes skills that are valuable in many sectors of the economy (such as general education, literacy, and some computer skills). Specific human capital is related to a specific industry or firm and is generated through employment experience and on-the-job training that make a worker more productive in that firm or industry. Scarring results from a decay of either (or both) of these types of human capital. When workers lose their jobs, they lose the firm-specific skills and relationships they had learned and built in those jobs. Burdett, Carrillo-Tudela, and Coles (2020) find that lost human capital is

54 e mployment in Crisis

the most important factor in determining the costs of job loss to workers, but Carrington and Fallick (2017) suggest that additional research is necessary to assess the extent of this factor’s contribution.

However, scarring does not strictly require job loss. To the extent that on-the-job training and experience generate human capital, keep existing human capital from eroding, and signal a worker’s quality to other employers, the quality of workers’ early job matches can have significant effects on their human capital accumulation and career trajectories. Workers who first enter labor markets in bad times have been shown to have lower earnings than otherwise similar workers who first enter labor markets in good times.

This section reviews the literature and reports the results of two new background papers, developed in the context of this flagship research project, on labor market scarring in Latin America. Two of the papers use matched worker-firm data to look at scarring following job loss and scarring caused by firms’ exposure to crises. The third uses labor force surveys to look at scarring beyond those employed in the formal sector and consider how conditions at the time of entry into the labor market impact workers’ employment outcomes over the first decade of their working lives.

This section also examines whether different types of workers are affected in different ways by crises. Scarring-based losses will not be incurred by every worker; rather, they will be concentrated among certain groups of workers. This section identifies some of those groups, who merit special attention from policy makers in order to reduce the economic and social costs of crises. Understanding the differences in responses to crises across types of workers is important, because it allows governments to target support where it is needed most.

Severity of long-term effects

Scarring caused by job loss

Losing a job has significant costs in the short term and the long term. The earliest studies on this topic focused on the United States. Jacobson, LaLonde, and Sullivan (1993a, 1993b) show that US workers incur prolonged periods of lost wages after losing their jobs. They also demonstrate that a sample of workers in Pennsylvania experienced losses of approximately 25 percent of their predisplacement earnings that lingered for five to six years after the loss of their jobs (Jacobson, LaLonde, and Sullivan 1993a). Other studies find the same phenomenon in other countries.2 Longer or more frequent spells of unemployment have larger negative wage consequences (Arulampalam 2001; Gregg and Tominey 2005; Gregory and Jukes 2001). In addition, scarring from job loss can last across generations. Oreopoulos, Page, and Stevens (2008) find that Canadian sons whose fathers were displaced had annual earnings 9 percent lower than those of similar children whose fathers did not experience similar employment shocks. However, most of the research in this area has focused on developed countries.

One of the more arresting symptoms of economic crises is mass layoffs caused by firm closures. Looking at mass layoff events helps address the potential endogeneity of workers who leave firms voluntarily, because the reason for leaving a firm (even in the context of a mass layoff) has a significant effect on subsequent earnings and employment (Flaaen, Shapiro, and Sorkin 2019). However, there are surprisingly few studies on scarring of displaced workers following firm closures in Latin America. Amarante, Arim, and Dean (2014) and Kaplan, González, and Robertson (2007), studying Uruguay and Mexico, respectively, are important exceptions. Amarante, Arim, and Dean (2014) find wage losses in excess of 14 percent one year after job separation for high-tenure Uruguayan workers. The reduction in wages is even greater for workers who separated during downturns. In Mexico, Kaplan, González, and Robertson (2007) use administrative matched firmworker data to follow workers who left firms during “mass layoffs”—events in which a large share of the firms’ employment leaves the firms. They find large reductions in wages for these workers and greater reductions for workers who separated during downturns.