Losing a Job During a Recession

April 22, 2010

Each year, even when the economy is growing, millions of people lose a job for reasons other than poor performance or misconduct. In an issue brief released today, CBO reviews the research on the short- and long-term effects of involuntary job loss for reasons other than poor performance or misconduct on people’s future employment and earnings. In light of the recession that began in December 2007 and CBO’s projection that, under current law, the unemployment rate will remain elevated for a number of years, the brief focuses on the effects of involuntary job loss during periods of weak economic activity. The brief also summarizes some of the government programs that help people who have lost their job.

Many people who lose a job involuntarily find a new job, some quite quickly (within a month or so) and others after more time. For example, among people who were displaced from their job in 2003—when the unemployment rate peaked at 6 percent—and were reemployed by January 2006, CBO found that 10 percent were reemployed within a week. Another 25 percent found a job within a month. In contrast, 25 percent were jobless (although not necessarily searching for work) for six months or more.

In late 2009, about 4 percent of the labor force consisted of unemployed people who had been out of work for 27 weeks or more—well above the previous peak, which occurred after the back-to-back recessions of the early 1980s, and a substantial fraction of all of those who were unemployed. A shift away from temporary layoffs and toward permanent layoffs has contributed to the increased duration of unemployment in recent decades.

Further, finding a job may require substantial effort and flexibility, especially when openings are scarce, and the need to shift from one industry or occupation to another to gain a new job is partly responsible for workers’ prolonged unemployment. One analysis of data from 1978 to 1990 found that in some states with high rates of unemployment, that rate decreased only when many of the unemployed people moved to a different state. Now, when many homeowners owe more on their mortgage than their house is worth, many people may not be able to make such moves.

Some people who lose a job involuntarily do not find a new job. Some of those people may decide not to look for a new job, while others may look for a job but be unsuccessful in their search. Among those who lost a job involuntarily between 1981 and 2003, three groups of workers—women, older people, and less-educated people—were more likely to leave the labor force than were others who lost a job.

In both the short and the long term, people who lose a job for reasons other than poor performance or misconduct and then find a new job see their earnings decline, on average. Short-term declines in earnings—those in the first few years after a job loss—tend to be larger for people who lose a job during or shortly after a recession. For example, those who lost jobs from 2001 through 2003 experienced a 14 percent decline in earnings. The average decline in earnings associated with a job loss in periods of stronger economic activity between 1984 and 2000 was smaller.

For people who have acquired a substantial amount of firm-specific knowledge, the loss of a job can be associated with a relatively large decline in earnings in both the short term and the long term. Among men who lost their jobs in a mass layoff during the 1982 recession, older workers (those ages 50 to 55) experienced earnings declines in the year following their job loss that were more than 40 percent higher than the earnings declines of men in their 20s and 30s. Initial declines in earnings associated with losing a job during a recession may persist for many years. The new job might have both lower earnings and less potential for earnings growth in the future than the lost job. Among the men who lost their job in a mass layoff during the 1982 recession, earnings 15 to 20 years later were about 20 percent lower than those of similar men who did not lose their job.

A number of government programs are available to help people who have lost their job, such as unemployment insurance (UI) and the Supplemental Nutrition Assistance Program (formerly called the Food Stamp program). Disability Insurance and Supplemental Security Income are also available to some people who are unable to work because of a severe health problem. Training and education programs as well as provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (known as “COBRA”)—which makes possible the continuation of health coverage at group rates for individuals—are also helpful to some people. Some of the programs are available only to people who have lost their job involuntarily and others are designed to help people, with or without jobs, who are experiencing misfortune (especially financial distress) for various reasons.

During the recent economic downturn, the federal government has expanded eligibility or increased the amount of benefits available through some of those programs, including the UI program. In fiscal year 2009, outlays for UI benefits totaled $119 billion. That represents a substantial increase over spending for UI in 2007, which totaled $33 billion.

This brief was prepared by Molly Dahl and Joyce Manchester of CBO’s Health and Human Resources Division.