published in: American Economic Review, 2006, 96 (5), 1679-1705
We exploit administrative data on young German workers and their employers to study the
long-term effects of an early job loss. To account for non-random sorting of workers into firms
with different turnover rates and for selective job mobility, we use changes over time in firm-
and age-specific labor demand as an instrument for displacement. We find that wage losses
of young job losers are initially 15% but fade to zero within five years. Only workers leaving
very large establishments suffer persistent losses. A comparison of estimators implies that
initial sorting, negative selection, and voluntary job mobility may have biased previous U.S.
studies finding permanent effects of early displacements.
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