Economics 11/13: Mixed signals: To what extent does male wage scarring vary with the characteristics of the local labour market in which unemployment was experienced?

Abstract

I test the hypothesis that unemployment experienced in high unemployment regions is less likely to be viewed by employers as a negative productivity signal, and more as a characteristic of the region. This predicts that unemployment's short-run negative wage effects will be mitigated if experienced in high unemployment regions. If so, then what long-term implications does this have for future wage growth (Wage Scarring)? How important is regional heterogeneity in driving wage outcomes? Continuous work-life histories are matched to the regional context in which individuals reside. This novel data set permits control for the timing of career disruptions, as well as regional location at the time of displacement, whilst searching and at re-employment. Persistent wage penalties are found, conditional on previous labour market status. Seminal UK research concludes that the first spell of non-employment carries the highest penalty. Considering unemployment and inactivity, no reduction in the penalty associated with incidence of inactivity is found. Strong regional differences are found in the impact of redundancy on wage growth. This is contingent on labour market tightness and urbanity of the region in which unemployment was experienced. Redundancy followed by unemployment in areas of high economic activity is equally damaging for future earnings potential, independent of age. Moreover, robust evidence is found supporting the main hypothesis in the UK, on average and for over 45s made redundant in their previous jobs.

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Authors

Philip Ball

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