How destructive is creative destruction? : the costs of worker displacement

Abstract

We analyze the long-term effects of worker displacement using a large administrative matched employer–employee database spanning throughout the entire Norwegian economy. Our focus is on prime-age male manufacturing sector workers displaced due to plant closure or significant downsizing of the plant. The data follows these workers within the Norwegian economy up to seven years after displacement. We demonstrate that displacement significantly increases the probability of exiting the labor force. Workers who remain in the labor force suffer long-lasting negative earning losses. The magnitude of this loss, which peaks at 5 percent two years after displacement, is clearly smaller than what is found for the US. Older workers, workers with low education levels and workers displaced from small plants are more vulnerable than other groups. Twenty percent of the displaced workers find a new job in a sister plant within the same firm. In the long run, 35 percent of the displaced workers change industry, as compared to 17 percent of nondisplaced workers.