Earnings and Welfare after Downsizing: Central Bank Employees in Ecuador

This article measures the earnings and welfare losses experienced by displaced employees of the Central Bank of Ecuador. It links these losses to individual characteristics such as gender, education, seniority, and salary in the public sector. Data are from a survey of displaced employees that included subjective evaluations of well-being in addition to information on activity and earnings. The welfare losses of separated employees are not highly correlated with their earnings losses, partly because some of them (especially women) withdrew from the labor force after separation. Earnings and welfare losses also vary depending on the nature of displacement, which was voluntary for roughly half the employees and involuntary for the rest. Overall, the losses were larger for employees with less education and more seniority, but not necessarily larger for employees with higher salaries. However, compensation for displacement was based on a rule of thumb that involved only salary and seniority and was applied across-theboard. For those employees who left voluntarily, the resulting compensation package was, on average, about 20 percent higher than the welfare loss. The article derives the implications of these findings for the design of assistance programs for displaced workers and, more specifically, for the tailoring of compensation packages to their individual characteristics.