Earnings Losses After Non-Employment Increase With Age

Germany has the highest unemployment rate of older people in comparison to the average unemployment rate of all developed economies. Obviously older people face stronger difficulties to re-enter the labour market after a non-employment spell. This contribution analyses if these difficulties also lead to higher earnings losses of older employees after re-entering the labour market. More specifically, this paper calculates the relative earnings of employees before and after a non-employment spell and compares them with the earnings of employees without non-employment spells. Splitting employees into four age groups shows that older employees who lose their jobs face higher earnings losses. A couple of years before non-employment older employees still earn more than employees with comparable observable characteristics without non-employment spells. This earnings advantage turns into a strong disadvantage directly before the non-employment spell. Younger employees have a relatively constant earnings disadvantage before non-employment, however. One year after the nonemployment spell, younger employees earn at least what their comparison group without non-employment spells earns. By contrast, older employees start one year after their nonemployment spell with an earnings disadvantage of up to ten percent and even face measureable earnings losses six years after non-employment. There are several reasons for higher earnings losses of older employees after nonemployment – they have higher specific human capital investments, higher seniority earnings, and more frequently have to change jobs involuntary than younger employees. Finally, older employees with non-employment spells might more frequently be employed in enterprises in economic trouble. A comparison of the earnings losses of those employees who re-enter the same company after non-employment suggests the prevalence of the latest reason – younger employees get an earnings premium when they re-enter their previous employer and older employees face an earnings loss in comparison to those employees who find a job at another employer after non-employment.

Zwick, Thomas (2008), Earnings Losses After Non-Employment Increase With Age, ZEW Discussion Paper No. 08-041, Mannheim, published in: Schmalenbach Business Review.