The RBA has released a new Bulletin report entitled “The Financial Cost of Job Loss in Australia”, which estimates that losing one’s job has long-term implications on one’s earning capacity:
Workers who lose a job tend to experience large and persistent earnings losses. On average, real earnings are around one-third lower in the year of job loss, and it takes at least four years for an individual’s annual earnings to recover. Earnings losses are particularly persistent following the loss of a long-term job. Workers who find new employment tend to work fewer hours at lower hourly rates of pay…
Graph 2 shows estimates of the effect of job loss on real earnings, relative to what would have been expected in the absence of job loss (see also Table A1). The results indicate that Australian workers who lose a job tend to experience large and persistent losses of real earnings. Real earnings are around one-third lower in the year of job loss, on average. Earnings recovery slowly; it takes at least four years for those who lost a job to be earning as much as if they had not lost a job. Overall, cumulative losses of real earnings are equivalent to around 50 per cent of a workers’ real earnings in one year, or a little under $40,000 for the average income earner in 2018/19. These estimates can be interpreted as the average effect of job loss on earnings; in practice, workers’ experiences differ significantly and include better and worse outcomes…
The loss of a long-term job appears to be more costly than the loss of a shorter-term job. Graph 3 shows estimates of earnings losses based on the length of time with their employer. The experience of those who lose their jobs with at least two years of tenure is similar to the short-term estimates reported by the OECD (2016). When we define job loss as the ending of an employment relationship of at least 10 years, real earnings are around 40 per cent lower in the year of job loss, compared with around 30 per cent for a sample of all workers who lost a job. Of note, the recovery in annual earnings is slow and incomplete even after five years; earnings remain around 20 per cent below the level that would be expected if the worker had not lost a job. That said, the sample of workers who lost a long-term job is relatively small (around 420 cases), so some caution in interpreting these results is warranted…
The finding that the loss of a long-term job is particularly costly is consistent with workers accumulating skills and networks that are not transferable to other workplaces…
Conclusion
Job loss can be financially costly for workers, particularly when a long-term job is lost. Real earnings begin to decline in the year prior to job loss and fall sharply in the year of job loss. Earnings recover slowly. Most of the cost of job loss stems from time spent in unemployment, but even re-employed workers tend to work fewer hours at lower hourly rates of pay. Government benefits have tended to reduce the cost of job loss by around one-third.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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