Known unknowns in closing firms and the earnings losses of laid off workers and early leavers

Abstract

We leverage a rare feature of the Canadian Employment Insurance system, which requires all employers to provide a detailed reason for every job separation that occurs in their firm, to distinguish between the earnings losses of workers permanently laid off from a closing firm and those of a broader category of workers often presumed to be affected by an impending firm closure. We highlight the role of assumptions about workers’ awareness of the impending closure and argue that a single set of assumptions imposed on all firms is unlikely to yield a meaningful estimate of the average earnings loss. Instead, we consider a range of estimates bounded by two key scenarios. Compared with tightly matched controls, the earnings losses of displaced workers range from 15.2% to 34.6% in the first post-closure year and from 7.6% to 15.0% in the fifth year. The lower bound is heavily influenced by those who leave the closing firm for reasons other than a permanent layoff.