In this week’s installment of the Next American Economy breakfast series, Roosevelt Institute Senior Fellow Bo Cutter hosted Columbia economics professor Till von Wachter for a discussion of the serious damage unemployment can have on workers. Wachter points out that severe job losses during recessions harm not only short-term earnings but also lifetime career earnings, health, family, and even “short- and long-term mortality.” Those laid off during a recession can lose about 20 percent of their earnings over their lifetimes. And “it’s not just middle-aged men in durable goods manufacturing,” Wachter points out. Children of job losers and young people entering a depressed labor market also face grimmer futures. Watch here as Wachter outlines his findings:
All workers, even those who find new jobs relatively quickly, “suffer lasting and substantial adverse consequences from job destruction," he says. The key reason is the loss in human capital. “Workers had skills particular to that employer or that occupation,” so if they have to switch industries they will likely lose those skills and may get stuck in lower wage positions. New workers also face this problem, as their first jobs may be worse and they often become stuck in less attractive career tracks.
But what about “creative destruction"? Does job destruction during recessions have a cleansing effect on the overall economy, as it enables resources to be allocated to more productive enterprises? Wachter's answer: not really. He argues that human and physical resource reallocation occurs predominantly in stronger economic times, not during recessions. So the majority of job destruction is a cost without a benefit. “There’s not much cleansing fire” in recessions, he says.
So what can policy do about all of this? He suggests that given the severe and long-term consequences of lay offs in a recession, policies should focus more on preventing job losses, rather than just ameliorating the short-term effects of unemployment. The idea is to hang on to workers – which is better for them, their employers, and the economy overall.
For more, watch Wachter’s full presentation below: