Economic Seminar - Frank Leenders (Stockholm School of Economics)

Social Security and Life-Cycle Variation in the Cost of Job Loss

Abstract
In this paper, we study how the effect of displacement on subsequent earnings and employment differs by the worker's age at the time of the displacement. We use a life-cycle model to investigate the extent to which this variation is driven by the design of the social security system. Using German social security data, we first establish that earnings losses, both upon impact and in the long run, generally increase in age. Employment losses, on the other hand, increase in age only until workers approach the window for early retirement. Our structural model features search frictions, human capital, and savings, and contains a detailed representation of the German unemployment insurance, welfare, and pension systems. We use the estimated model to decompose the life-cycle variation in earnings and employment losses. We find that the age-dependencies embedded in the social security system, along with mortality risk and age-dependent job finding rates, are important in accounting for the age gradients in post-displacement earnings and employment losses, especially later in the working life. Furthermore, while displacement comes at a high welfare cost, workers are able to effectively shield themselves from some of this cost through unemployment insurance and asset accumulation. Finally, while workers with high lifetime income tend to retire early, job loss tends to nudge these workers to postpone their retirement.