DP16861 The Effect of Labor Market Shocks Across the Life Cycle

Author(s): Kjell G Salvanes, Barton Willage, Alexander Willén
Publication Date: January 2022
Keyword(s): Disability, economic shocks, Education, Family Formation, Fertility, Human Capital, Job Displacement, Labor Supply, mobility, retirement
JEL(s): I20, J63
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16861

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 â?? 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.