US vs. France: Worker Displacement Wage Losses

The paper sets out to compare the impact of worker displacement on wage losses in France and the United States. It aims to determine the extent of wage losses in both countries and analyze the relative contributions of two key factors: the loss of seniority-accumulated firm-specific earnings potential and match heterogeneity. Existing research on US worker displacement shows significant wage losses (10-25%), primarily due to persistent wage reductions upon re-employment, but data on European countries is limited. The study addresses this gap by using a consistent econometric framework and comparable longitudinal micro-data (French Employment surveys and the US Panel Study of Income Dynamics) to estimate wage losses and disentangle the effects of seniority and match heterogeneity. Understanding these factors is crucial both analytically (characterizing labor market dynamics and wage-setting mechanisms) and prescriptively (informing public policies to mitigate the impact of job displacement).

The paper acknowledges the existing research on US worker displacement, highlighting the documented significant wage losses. However, it notes a lack of comparable data and analysis for European countries and a general lack of understanding regarding the structural determinants of post-displacement outcomes in both regions. The study's primary contribution is to address these shortcomings by providing a comparative analysis using a standardized econometric approach and similar longitudinal datasets from France and the US. A second significant contribution is the empirical separation and analysis of the two components influencing wage adjustments: the loss of firm-specific earnings related to seniority (A-losses) and the impact of match heterogeneity (S-losses). This decomposition aids in understanding national labor market dynamics and informing the design of effective public policies such as training or job search assistance.

The study finds that wage losses for displaced workers are remarkably similar in France and the US, ranging from 10% to 15%. Despite this similarity in the overall magnitude of wage losses, a key difference emerges when examining the sources of these losses. In France, the majority of wage reductions are attributed to the loss of firm-specific earnings potential accumulated through seniority (A-losses). This implies that intra-firm dynamics heavily influence individual wage trajectories. In contrast, more than half of the measured wage losses in the US are explained by the downgrading of displaced workers into lower-quality job matches (S-losses), indicating a substantial impact of external labor market dynamics and job search outcomes. These findings suggest that the nature of post-displacement wage adjustments differs significantly between the two countries, despite the comparable overall impact on wages.

This section introduces a simplified model to understand the structural determinants of post-displacement wage losses. The model considers a two-firm economy (high-wage and low-wage firms) where workers are either employed or unemployed. Job termination is assumed to be exogenous, occurring two periods after employment. Workers may receive alternative job offers during employment. The model analyzes two distinct job search strategies for unemployed workers: accepting only high-wage offers or accepting all offers. This framework allows the examination of different sources of wage losses. One type, termed 'S-losses,' results from the inability to transfer earnings acquired through extended job search and inter-firm mobility (related to match heterogeneity). The other, 'A-losses,' originates from non-transferable earnings accumulated through seniority on the pre-displacement job and driven by intra-firm wage dynamics. The model's structure lays the foundation for distinguishing these two sources of wage loss and explaining how they relate to labor market dynamics and job search strategies.

The model highlights the crucial distinction between A-losses (firm-specific earnings related to seniority) and S-losses (match heterogeneity). The paper emphasizes that these types of losses have different origins and implications. A-losses reflect non-transferable earnings linked to seniority, potentially arising from compensation deferral or specific human capital investments. S-losses result from extended on-the-job search and inter-firm mobility, reflecting the external labor market dynamics of job prospection. The A-losses vs S-losses distinction has significant analytical implications for understanding individual wage dynamics and the factors contributing to wage losses after job displacement. It also provides clear implications for public policy. If wage adjustments stem primarily from S-losses (match heterogeneity), then job search assistance programs are likely to be more effective. However, if A-losses (loss of seniority-related earnings) are dominant, then training and skill development initiatives would be more pertinent. The paper argues for the importance of this decomposition to inform policy design and accurately assess the true impact of job displacement.

This section addresses previous interpretations of the relationship between seniority and post-displacement wage losses. Earlier studies often linked positive returns to seniority to the loss of specific human capital, with job tenure serving as a proxy. However, the paper points out that this interpretation overlooks several crucial points. Firstly, upward-sloping wage-seniority profiles might arise from compensation deferral mechanisms rather than specific human capital accumulation. Secondly, pre-displacement seniority can be endogenous and positively correlated with match quality, making it difficult to isolate the effect of specific human capital loss. The study further discusses the impact of industry switching on wage losses, recognizing that specific human capital may be partially transferable within the same industry, but its portability is limited. The impact of pre-displacement rents from factors like larger firms or unionized jobs also affects wage losses upon displacement. These considerations demonstrate the complexities in disentangling the different factors that contribute to post-displacement wage losses and highlight the need for the more nuanced approach offered by the A-losses/S-losses decomposition.

The study utilizes two primary datasets: the French Employment Surveys (FES) and the US Panel Study of Income Dynamics (PSID). The FES, conducted annually by INSEE (the French national statistics institute), surveys approximately 60,000 households, gathering detailed information on individual characteristics (age, education, region), job characteristics (industry, seniority), wages, and hours worked. The data includes information on reasons for unemployment, distinguishing between voluntary quits, seasonal work ending, fixed-term contracts expiring, and layoffs. Layoffs are further categorized into 'mass layoffs' (more than 10 workers terminated simultaneously from the same firm) and 'other layoffs/fired.' The PSID, covering the period 1983-1992, provides similar data for the US, distinguishing between job loss due to company closure/changes and layoffs/firings. Both datasets present challenges in definitively identifying involuntary separations, as 'individual' layoffs could involve performance-related dismissals, making precise classification of displacement challenging. In both cases, the analysis focuses on individuals who were employed, became unemployed, and then found re-employment. The control group consists of individuals who remained employed with the same firm throughout the observed period. The use of both datasets enables a robust cross-national comparison.

For the French data, the final sample consists of individuals employed two periods prior to unemployment, who then experienced unemployment before re-employment. The study constructs six three-year panels of labor market history. The French sample comprises 531 displaced workers whose displacement could be ascertained. The US sample, derived from the PSID (1983-1992), includes 568 displacement episodes. Both samples are categorized by type of job separation (mass layoff vs. other layoff/fired). A three-level educational classification is used for both countries, reflecting differences in educational attainment. The study acknowledges that the long unemployment duration in France and the difficulties in precisely identifying displacement in the FES might lead to sample selection issues; only about half of the French mass layoff group and one-third of the other layoff/fired group found re-employment within the observed period. For the US data, only displaced workers who experienced a period of unemployment are included to enhance comparability with the French sample. The main characteristics of the samples (age, education, pre-displacement seniority) are compared to assess potential selection bias. Pre-displacement job tenure data from the PSID was recoded to address reported inconsistencies.

The core econometric method involves a wage growth equation using two-year changes in log individual wages. This is a standard technique in labor economics to assess the impact of job displacement. The equation controls for individual fixed effects, time-varying effects, and observable individual characteristics. A key coefficient captures the effect of job displacement on subsequent earnings. The initial findings, consistent with previous US job displacement research, reveal significant post-displacement wage losses. For instance, US workers experienced an average 0.15 log point fall in weekly wages and a 0.13 log point fall in hourly wages, suggesting a reduction in hours worked as well. The French data also shows significant wage losses (0.15 log points for weekly wages and 0.13 log points for hourly wages), indicating that job displacement in France does also lead to substantial reductions in wages. The study further investigates the impact of education levels and identifies potential sample selection biases, confirming the robustness of the results.

This section presents the initial estimates of wage losses for displaced workers in both France and the US. The results show that the overall magnitude of wage losses is surprisingly similar in both countries, ranging from 10% to 15%. This finding contrasts with the common perception of a more rigid French labor market. The analysis uses a consistent econometric framework, controlling for various factors, to ensure comparability. However, while the overall magnitude of losses is similar, the study emphasizes that the sources of these losses differ significantly between the two countries. This sets the stage for the subsequent decomposition of wage losses into its underlying components to provide a more detailed explanation.

This section focuses on decomposing the observed wage losses into two key components: A-losses and S-losses. A-losses represent the loss of seniority-accumulated firm-specific earnings potential, reflecting intra-firm wage dynamics. S-losses represent the losses due to match heterogeneity, indicating the impact of external labor market dynamics and the quality of job matches after displacement. The results show a striking difference in the relative contribution of these two sources. In France, A-losses account for the majority of wage reductions, highlighting the importance of firm-specific seniority in wage determination. Conversely, in the US, S-losses contribute significantly more to the overall wage decline, emphasizing the role of job search outcomes and match quality. The study notes that approximately two-thirds of wage loss in France is explained by A-losses, versus one-third by S-losses. The US, conversely, has between one-half to two-thirds explained by S-losses.

The analysis is extended to examine how wage losses vary across different education levels. The study finds that for workers with medium levels of education, wage losses are generally higher in the US than in France. However, for those with high levels of education, the differences in wage losses between the two countries are less pronounced. For low-education workers experiencing mass layoffs, wage losses in France are about half those of similar US workers. The paper discusses possible explanations for these variations, including the impact of minimum wage legislation. The study also addresses potential sample selection bias resulting from the different re-employment rates and unemployment durations in France and the US. A Heckman two-step estimation is employed to assess the presence of selection effects, but the results indicate no significant selection bias in the overall wage loss estimates. This strengthens the reliability of the comparative analysis presented.

The study's key policy implication stems from the contrasting sources of wage losses in France and the US. In France, the dominant factor is the loss of firm-specific earnings potential accumulated through seniority (A-losses). This suggests that policies aimed at mitigating this loss, such as training programs that enhance transferable skills or programs that help displaced workers retain some portion of their firm-specific knowledge, would be most effective. In contrast, the US shows a stronger impact of match heterogeneity (S-losses), highlighting the importance of job search and the quality of job matches after displacement. Therefore, policies that support job search activities, provide job search assistance, or improve the information available to workers about job opportunities could better mitigate wage losses in this context. The findings strongly support a tailored approach to worker displacement policies, emphasizing the need to understand the specific labor market characteristics and determinants of wage losses within each country.

The research challenges the conventional view of a rigid French labor market lacking wage flexibility. The significant wage losses observed in France demonstrate that even in labor markets perceived as inflexible, job displacement leads to considerable financial consequences for workers. While the magnitude of these losses is slightly lower than in the US, the study cautions that the higher duration of unemployment experienced by displaced workers in France could potentially offset this difference, resulting in higher overall welfare losses. This finding underscores the need for a more nuanced understanding of labor market dynamics and the effectiveness of different policy approaches across countries, even when the overall magnitude of wage losses appears similar.

The study highlights the importance of understanding the different contributing factors to wage losses following displacement and recognizing that a single policy approach is unlikely to be effective across all contexts. While the overall magnitude of wage losses might be similar between two countries, the underlying causes could differ substantially. For example, in the US, the emphasis should be on policies to improve job search outcomes, provide better job matching services, and address the issue of downgrading into lower-quality job matches. Conversely, in France, the focus should shift toward policies that aid in transferring firm-specific skills and knowledge to new employment opportunities. The study emphasizes the need to move beyond simple comparisons of the overall levels of wage losses and to focus on the underlying mechanisms causing those losses in order to inform effective policy design.