The Labor Market Spillovers of Job Destruction

Workers who lose their jobs during recessions face strikingly large and persistent declines in their future earnings. Using individual-level administrative data from the United States, this paper shows that an important driver of these costs is the general equilibrium effect of firms simultaneously destroying many jobs during economic downturns. To obtain variation in the job destruction rate that is unrelated to the productivity of new jobs, we exploit the differential exposure of local labor markets to the idiosyncratic shocks of large, multi-region firms. We find that job destruction fluctuations explain one-third of the difference between the average worker’s cost of job loss in recessions and expansions. Accounting for additional spillover effects on employed workers, each marginal job that is destroyed imposes a total annual cost of approximately $17,000 on other workers in the same labor market. These negative spillovers could be offset by the potentially positive effects of job destruction on firm profits and the cleansing of low-quality jobs. To quantify this trade-off, we estimate a general equilibrium search model that features heterogeneous firm productivity, job-to-job mobility, endogenous separations, and state-dependent human capital accumulation. To match our reduced-form estimates, the model requires that a spike in aggregate job destruction congests the labor market, reducing workers’ ability to find new jobs and limiting their human capital growth. Our results suggest that preventing the destruction of even low-productivity jobs can mitigate output losses from recessionary shocks.