Long term effects of losing a job are less severe in Northern Europe than in the rest of Europe
Losing a job has dramatic consequences in the short run and these effects are persistent. However, the long-run effects of unemployment vary in different parts of Europe. In Southern Europe, the consequences of losing one's job are economically more severe than in Northern Europe.
Losing a job can have detrimental and long-lasting consequences on future labor market prospects of workers who are laid off. This has been documented in several studies and can be considered one of the most influential results in labor economics because it offers a simple test of how well labor markets work. In relatively efficient labor markets, people are able to find a new job shortly after losing one. On the contrary, persistent unemployment or loss in labor earnings are evidence of inefficient labor markets. The comparison of earnings and employment losses in different countries can therefore teach us something potentially important about which institutions work and which others do not.
Unfortunately, credible cross-country comparisons based on evidence in the existing literature are extremely hard to implement in practice. In particular, it is hard to compare the economic consequences of job loss in different institutional settings because of differences in sampling schemes, data quality and research designs. For instance, job loss effects on earnings and employment can sometimes vary substantially even when focusing on studies published within a given country.
Consequences of job loss are persistent in all countries
In joint work recently published on the American Economic Review: Insights, together with Antoine Bertheau (NHH, Norway), Edoardo Acabbi (Universidad Carlos III de Madrid, Spain), Cristina Barceló (Bank of Spain, Spain), Andreas Gulyas (Mannheim University, Germany) and Raffaele Saggio (University of British Columbia, Canada) we overcome these comparability limitations by analyzing job loss effects for seven European countries via a harmonized research design (Denmark, Sweden, Italy, Portugal, Spain, Austria, France).
Finland does not appear in the list of countries covered. Although it is reasonable to expect joss effects of Finnish workers to be smaller than those of Southern European ones, it is possible that the losses in Finland are somewhat larger than in Sweden and Denmark given the smaller spending in active labor market policies and the larger caseload of caseworkers in Finland compared to the other two Nordic countries.
In the paper, we show that losing a job has dramatic consequences on labor earnings in the short run. One year after job loss, the labor earnings of the workers who lose their job in Denmark, Sweden, Austria, and France are 20 percent lower than before losing the job. Earnings losses of Southern European workers are roughly twice as large. Moreover, the detrimental consequences of job loss are persistent for all countries covered.
Long-term effects differ between Southern and Northern Europe
Workers who lose a job in Northern Europe experience losses that are considerably smaller than those for Southern European workers. For instance, five years after job loss, Northern European workers still suffer 10 percent earnings losses, but this number is roughly three times as large for Southern European workers. A similar picture is obtained when analyzing the consequences of job loss on employment: everyone loses in the short-run and there is only a partial recovery in the long-run. However, workers in Nordic countries face much better labor market prospects of those in Southern (and partly Central) Europe.
In additional analyses we instead find very little cross-country heterogeneities in the wage losses. This shows that the different earnings losses previously mentioned are driven by the fact that Southern European workers tend to find it particularly hard to find a new job and therefore they tend to stay unemployed for longer.
Labour market policies and institutions might play a key role
How to interpret these striking differences across countries? The results suggest that institutional differences might play an important role. In the working paper version of the paper we show that the size of the job loss effects is strongly and robustly related to spending in active labor market policies, an important feature of the Nordic labor market institutions. Despite this last set of results being correlational in nature, it is likely that a more efficient transition towards finding a new job passes through sound policies targeted to the unemployed jobseekers.