Wage Growth over Unemployment Spells
This article looks at the wage growth associated with a spell of unemployment during the past three recessions. Our main findings are threefold. First, half of all unemployed workers experience a lower hourly wage once they regain employment. Second, after an unemployment spell, older workers and those without a college degree experience lower wage rowth. Third, workers who regain employment in a different industry than they were in previously tend to experience a substantial wage decline. The analysis suggests that the COVID-19 pandemic not only led to unprecedented job losses, but it could also result in sizable wage losses for a large fraction of unemployed workers as they return to employment.
- Half of all unemployed workers have a lower wage after regaining employment than at their old job. For workers experiencing a wage decline, the median loss in hourly earnings is as high as 19 percent. COVID-19, therefore, has not only led to unprecedented job losses, it could also lead to a sizable wage decline for a large fraction of workers as the economy recovers.
- Wage growth after an unemployment spell is positively associated with education. The COVID-19 pandemic has resulted in far more job losses for less-educated workers than in the previous recessions, implying that in the pandemic workers with less education are not only likelier to lose their jobs, they are also more likely to have a slower wage growth once they get jobs.
- Losses of job- and industry-specific human capital are important causes of wage losses. The pandemic has resulted in an unprecedented fraction of workers on temporary layoffs: temporary layoff accounts for 73 percent of unemployment in May, a share that has never been over 20 percent in the past. If the pandemic ends in a relatively short period of time and workers on temporary layoffs can go back to their old jobs, human capital losses for them will be likely small, if any, so the number of unemployed who will experience wage losses will also be small. However, if the pandemic drags on and temporary layoffs become permanent layoffs, the number of unemployed who will experience human capital losses will likely be substantial—and so will wage losses.
Center Affiliation: Center for Housing and Policy
JEL classification: J31, E24
Key words: wage growth, unemployment spell, recession, industry switching
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