Labor market scarring: the long-run penalties of job loss or recession labor market entrance on skills

Policy Context

There is a large body of research on the wage and employment penalties experienced by laid off workers and workers seeking their first job during a recession (“labor market scarring”) but the mechanisms behind them—particularly in Latin America—are not well understood. This study seeks to uncover how skill loss faced by job losers or recession job entrants affects workers and contributes to labor market scarring in Uruguay.

Study Design

To shed light on the mechanisms underpinning long run penalties following job loss or a recession labor market entrance, the investigator leverages a granular dataset provided by the International Labour Organization (ILO). She applies a skills taxonomy to quantify the skills individuals used/learned in job spells, and the skills required in jobs they apply to. Using this skills data, she examines the extent to which job skill level explains persistent labor market scarring effects across various cross-sections of the population (generally, among youth, among women, etc.). Finally, the investigator may link to Uruguayan Social Security Administration employment data (earnings, wages, precise timing of job spells and loss events) to evaluate the skills needed in both jobs applied for and the job that the worker accepted.

Results and Policy Lessons

This study provides actionable information to labor market policy makers regardless of ultimate findings. Findings in line with skills atrophy suggest that skills training could be effective, while interventions to make skills more observable may be more appropriate if the results indicate that job seekers are less likely to be hired due to the stigma of job loss. No skill scarring despite earnings scarring suggests that “scarred” workers are performing similar jobs for lower pay.

Results forthcoming.