Working Paper: CEPR ID: DP16861
Authors: Kjell G. Salvanes; Barton Willage; Alexander Willn
Abstract: Adverse economic shocks occur frequently and may cause individuals to reevaluate key lifedecisions in ways that have lasting consequences for themselves and the broader economy. Theselife decisions are fundamentally tied to specific periods of an individual’s career, and economicshocks may therefore have substantially different impacts on individuals – and the broadereconomy - depending on when they occur. We exploit mass layoffs and establishment closures toexamine the impact of adverse shocks across the life cycle on labor market outcomes and majorlife decisions: human capital investment, mobility, family structure, and retirement. Our resultsreveal substantial heterogeneity on labor market effects and life decisions in response to economicshocks across the life cycle. Individuals at the beginning of their careers invest in human capitaland relocate to new local labor markets, individuals in the middle of their careers reduce fertilityand adjust family formation decisions, and individuals at the end of their careers permanently exitthe workforce and retire. As a consequence of the differential interactions between economicshocks and life decisions, the very long-term career implications of labor shocks vary considerablydepending on when the shock occurs. We also document important heterogeneity across gendersand education levels, both with respect to the immediate impact as well as the sum total of all theseeffects in the very long-term. We conclude that effects of adverse labor shocks are both morevaried and more extensive than has previously been recognized, and that focusing on averageeffects among workers across the life cycle misses a great deal.
Keywords: labor supply; human capital; education; fertility; family formation; mobility; retirement; disability; economic shocks; job displacement
JEL Codes: I20; J63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic shocks (F69) | Investment in human capital (J24) |
| Economic shocks (F69) | Relocation to new labor markets (J62) |
| Economic shocks (F69) | Reduced fertility rates (J13) |
| Economic shocks (F69) | Adjustments in family formation decisions (J12) |
| Economic shocks (F69) | Permanent exit from labor force (J26) |
| Age (J14) | Probability of leaving labor market after shock (J69) |
| Gender differences (J16) | Response to economic shocks (E32) |
| Education level (I21) | Response to economic shocks (E32) |