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FEATURE STORY October 20, 2020

Tackling the impact of job displacement through public policies


  • Cyclical downturns and structural changes can result in substantial job losses across the globe – a trend that is expected to accelerate given the ongoing COVID-19 crisis.
  • Job displacement poses a significant challenge for both developed and developing countries, but informal workers concentrated in developing countries may be hit particularly hard under extraordinary circumstances like the ongoing pandemic.
  • Careful public policy responses can help mitigate the costs of job displacements and support workers in finding reemployment.

The rise in joblessness due to the ongoing COVID-19 pandemic is expected to be extraordinarily steep, with significant economic, social and psychological consequences. While this presents a serious challenge, careful public policy responses can help mitigate the costs of job displacements and support workers in finding reemployment. Achim D. Schmillen, World Bank Senior Economist, discusses the issue in a recent Research and Policy Brief Causes and Impacts of Job Displacements and Public Policy Responses and shares insights for action. 

Every day, we hear worrying news of job losses brought on by the COVID-19 crisis. Even before that, a significant number of jobs were being lost each year due to fluctuations in the economy or advances in technology. What do we know about the cause and impact of job displacements?

In the United States, roughly 10 percent of workers are displaced from their job over a typical three-year period. The rate of job loss is procyclical, amounting to around 12 percent even in relatively mild recessions; during the global financial crisis of 2007 to 2009, it reached 16 percent. The job loss rate during the ongoing COVID-19 crisis will likely be higher still. As for structural changes, there are concerns that breakthrough technologies such as artificial intelligence and robotics will radically change the nature of work and dwarf previous waves of technological change in terms of labor market disruption.

These job displacements have dramatic and long-lasting effects on the employment, earnings, and income prospects of the workers that were laid off. Many displaced workers experience extended spells of unemployment, and once they find new jobs, they tend to suffer significant and long-lasting earnings reductions. U.S. workers displaced from previously stable employment relationships in the recession of 1982 suffered immediate losses in annual earnings of 30 percent compared to similar nondisplaced workers. Even 15 to 20 years later, their average earnings losses amounted to 15 to 20 percent of their earnings before they were displaced.

The economic challenges posed by job losses are significant, but you also raise the need to look at the social and psychological dimensions to inform policy responses. Why?

Yes, job displacements have detrimental effects on consumption, health and mortality. These impacts make it imperative to understand the advantages and drawbacks of possible public policy responses.

We know that lay-offs have significant psychological consequences. Many laid-off workers report even lower life satisfaction than people who have low-paid jobs, based on a fixed-term contract, or otherwise low-quality. Laid-off workers often struggle to transfer to another sector or geographic area quickly. They may lack appropriate skills, available jobs may be scarce, and moving to another region may be difficult. Careful public policy responses can help mitigate job displacement costs and support workers in finding productive reemployment.

The COVID-19 crisis is global, hurting countries at all income levels. Does the impact of job displacements differ across developed and developing economies?

While much of the literature on the impacts of job displacements have focused on developed economies, there is evidence that job loss impacts are also significant and long-lasting for workers in developing economies. In addition, we may see that in European countries, laid- off workers receive some relief through social or health insurance systems covered through their jobs. However, in developing economies, where most of the workers are in the informal sector with little or no employment history records, there is usually much lower coverage or even a complete absence of such formal mechanisms. Extraordinary circumstances like the ongoing COVID-19 crisis also threaten to hit informal workers particularly hard.

Looking at the formal sector, what are some of the approaches that policy makers can take to support workers who have lost their jobs?

The first widespread approach generally used to support laid-off workers is temporary income support, including unemployment insurance, redundancy payments, and social assistance programs.

An unemployment insurance system, if it exists, provides the first line of support for laid-off workers in the formal sector. However, they are usually designed as insurance for relatively short-term unemployment spells, not for longer-term spells typical of job displacements caused by a structural change or extraordinary circumstances like the COVID-19 crisis.

Redundancy payments can also provide income support. Depending on the design, they can sometimes support these workers for a longer period than unemployment insurance. Social assistance programs can provide a third line of support. Noncontributory interventions are usually based on need rather than targeted according to a prior employment relationship.

In most countries with unemployment insurance systems, unemployment insurance benefits and social assistance benefits are coordinated. For example, a worker may be eligible to receive social assistance benefits only when unemployment insurance benefits have been exhausted.

The second widespread approach to support laid-off workers is active labor market policies, such as employment services, education, and training, wage subsidies, or community employment programs.  Programs administered in the context of large-scale job displacements during recessionary periods face challenges because workers may be unable to transfer to another sector or geographic area easily.

How effective are labor market policies in supporting laid-off workers?

The effectiveness of active labor market policies is mixed, and costs per beneficiary vary widely. Properly designed and implemented, they can significantly increase the reemployment and earnings prospects for laid-off workers: Employment services can be very cost-effective, but they are of limited use where there are no jobs. Education and training have high costs but may be necessary for many displaced workers, given their mismatched skills for emerging jobs. They can yield significant returns if accompanied by strong employer involvement. Wage subsidies increase employment rates for eligible workers but targeting and design are essential to avoid displacing other (ineligible) workers. Community employment programs may be an effective way to provide temporary income support to displaced workers but rarely enhance participants’ future employability.

What should policy makers keep in mind as they respond to job displacements due to the COVID-19 crisis?  Are there any additional considerations?

A very important first step will be to develop a detailed action plan. Properly designed and implemented, temporary income support and active labor market policies can help mitigate the crisis's employment impacts. Critical complementary policies may include measures to ensure that displaced workers and their families have continued access to health care services.

During the COVID-19 crisis, short-term relief measures related to job displacements would necessarily need to focus on the provision of income support, in addition to policies that aim to prevent mass layoffs from happening in the first place. Wage subsidies could form an important element of the public policy response. While these schemes cannot successfully mitigate the impacts of structural changes, they can protect jobs when there is a temporary lack of labor demand. Medium-term recovery measures could be comprised of a more standard mix of income support and active labor market policies.

There are two additional considerations. First, temporary income support and active labor market policies need to be designed in an inclusive way that broadens eligibility beyond workers in formal jobs—particularly in developing countries, where an overwhelming share of poor and vulnerable workers are employed informally. This means a significant part of income support measures will need to be financed through general government revenue.

Second, all interventions will need to be implemented in accordance with public health and social distancing requirements. For instance, as much as feasible, payments of income support could be made digitally.