Martin Häggkvist: Job Loss and Labor Market Policy: Unemployment, Worker Adjustment, and Employment Protection

Abstract

Essay I: How do workers respond when their colleagues are displaced? Using a unique and detailed register of layoff notifications, I distinguish voluntary and involuntary separations. A matched difference-in-differences design reveals a 3.8% earnings drop among survivors, following workplace downsizing. I find no evidence of worker anticipation prior to the announcement; however, on-the-job search rises sharply in the month of announcement. When the identities of the retained and displaced workers are revealed, search effort is amplified among survivors, suggesting widespread insecurity across the workforce. This surge is driven primarily by workers with high future layoff risk; slack labor markets, and in large-scale downsizing events. The increase in search effort translates into higher job mobility: survivors become 9 percentage points less likely to remain with their employer than comparable workers in stable firms. Notably, 65% of this increase is driven by voluntary job-to-job transitions. These voluntary movers are positively selected on several productivity-related traits. Taken together, my findings demonstrate that the impacts of downsizing extend beyond those directly displaced.

Essay II (with Jonas Cederlöf and Peter Fredriksson): We study how anticipated unemployment insurance (UI) affects unemployment entry, unemployment duration, and the composition of the unemployed. We use a unique and detailed dataset of notified workers linked to administrative records, enabling us to track individuals from the initial revelation of job loss and onward. By exploiting an eligibility threshold – yielding a 21-percentage-point increase in the UI replacement rate in the event of unemployment – we find that eligible workers are less likely to find a new job during the notice period and are more likely to enter unemployment. The effect on unemployment incidence is substantial and accounts for three quarters of the unemployment increase due to higher UI generosity. Indeed, since the behavioral adjustment mainly occurs prior to displacement, the unemployment pool is selected on the treatment: workers with less favorable employment prospects are overrepresented among the unemployed. Our findings thus have implications for optimal UI-design since the negative fiscal externality mainly arises through search behavior prior to job loss.

Essay III: How much are employers willing to pay to sidestep employment protection? I study this in the context of seniority rules, aiming to shield tenured workers from job loss. Using detailed and unique Swedish layoff notification data matched with administrative registers, I identify the set of workers at risk of dismissal and construct counterfactual displacement lists based on the mandated layoff order. I find that workplaces with relatively more productive junior workers are significantly less likely to follow the seniority order. A one-standard-deviation increase in the relative productivity of recent hires reduces compliance by 7.7 percentage points. To circumvent the default order, employers provide higher severance pay and longer advance notice to senior workers, indicating that firms pay for the right to retain more productive workers. These results indicate that seniority rules impose efficiency costs on employers as employment protection is traded for financial compensation.