DP16861 The Effect of Labor Market Shocks Across the Life Cycle
Adverse economic shocks occur frequently and may cause individuals to reevaluate key life
decisions in ways that have lasting consequences for themselves and the broader economy. These
life decisions are fundamentally tied to specific periods of an individual’s career, and economic
shocks may therefore have substantially different impacts on individuals – and the broader
economy - depending on when they occur. We exploit mass layoffs and establishment closures to
examine the impact of adverse shocks across the life cycle on labor market outcomes and major
life decisions: human capital investment, mobility, family structure, and retirement. Our results
reveal substantial heterogeneity on labor market effects and life decisions in response to economic
shocks across the life cycle. Individuals at the beginning of their careers invest in human capital
and relocate to new local labor markets, individuals in the middle of their careers reduce fertility
and adjust family formation decisions, and individuals at the end of their careers permanently exit
the workforce and retire. As a consequence of the differential interactions between economic
shocks and life decisions, the very long-term career implications of labor shocks vary considerably
depending on when the shock occurs. We also document important heterogeneity across genders
and education levels, both with respect to the immediate impact as well as the sum total of all these
effects in the very long-term. We conclude that effects of adverse labor shocks are both more
varied and more extensive than has previously been recognized, and that focusing on average
effects among workers across the life cycle misses a great deal.
