Could the recession cause two decades of income loss?

Economists suggest that losing your job in the recession may shrink your long-term salary by up to 20%.

Last Updated: 31 Aug 2010

That’s the less-than-cheery conclusion of a piece in the New York Times, which argues that workers who lose their jobs in the recession may not get back to the same income level for two decades. It quotes a (gloriously-named) US economics professor called Till von Wachter, at Columbia; he argues that long-serving staff who lost their jobs in the 1980s recession are now earning up to 20% less than they would have been without the redundancy. The thousands of people still losing their jobs on this side of the pond will be hoping the same doesn’t hold true for the UK – but it’s not exactly implausible…

Wachter wanted to examine the effect of redundancy on qualified employees, so he focused on those who lost their jobs at a time when their employer cut their workforce by at least 30%, having worked there for at least three years. On average, most had failed to recover their previous wage levels even 15 or 20 years later. Often this was because they’d been with their companies for so long that they’d built up a very specific skill set; so even if they did manage to get a job elsewhere, they’d invariably have to start from scratch (at least to some extent). As a result, they’d also be at the bottom of the pile when future job cuts came around – and the vicious cycle would begin again.

According to the Times, this isn’t just a statistical anomaly, or a peculiarity of the 1980s recession, or even a malaise that only applies to manual workers. The paper has also been talking to a job-search support group in Florida, founded for professionals who lost their jobs in the aftermath of the downturn at the start of this decade. Apparently only one or two have been able to return to previous income levels in the subsequent eight years – which hardly bodes well for professionals being laid off at the moment.

Obviously all this data is very US-focused. And you’d hope that the increasing flexibility of labour markets would mitigate this problem to some extent. However, professionals who have lost their job in the current recession – particularly in badly-affected areas like property and financial services – are bound to find it hard to get back into the job market. With the economy apparently set for a sluggish recovery at best, it’s easy to imagine that it could take them a long time to get that salary back up to pre-crunch levels.

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