The Human Capital Losses of Displaced Workers

The characteristics of a sample of workers from the Panel Study of Income Dynamics who were laid off permanently or whose plants closed between 1968 and 1981 are examined. The displaced workers are found to have roughly the same characteristics as the typical labor-force participant, while those laid off are somewhat younger and less educated. A theoretical model of the losses resulting from displacement is put forth, in which the main loss is the value of the remaining firm-specific investment embodied in the worker. The size of this loss depends on the ability of firms and workers to foresee the impending end of the job, and on how their abili ty translates to the outcome of the bargaining over the burden and size of the firm-specific investment that is made. In general, the side that has a longer horizon will bear more of the costs and reap more of the re turns to this shared inves tment. The theory is linked to empirical work on earnings equa tions by means of the observation that the wage-tenure profile will reflect the amount of specific training embodied in workers. If workers have good information about impending displacement, the expected diminution in such investment will be reflected in a flattening of the wage-tenure profile as the date of displacement nears. In a sample of workers laid off or displaced between 1977 and 1981, we find that no such flattening is apparent. This suggests either that the worker has little information about impending displacement, or that both workers and firms have little information. The wage-tenure profile in the year before displacement is used, along with a series of projected quit rates based on several studies of the quit-tenure relation, to measure the present value (to the worker) of the lost firm-specific training. Using best guesses about the rate of depreciation of human capital and the real rate of interest, the losses average around $6000 for workers in the sample.