Frictions in the Low-Wage Labor Market
Abstract:
This paper studies the long-run consequences of losing a low-wage job using linked employer-employee earnings records and household surveys. For full-time workers earning $15 per hour or less in 2020 dollars, job loss due to a firm-wide contraction generates a 13% reduction in earnings 4-6 years later and more than $40,000 cumulative lost earnings. The majority of this decrease stems from reductions in employment and hours as opposed to wage rates: job losers are being twice as likely to report being unemployed and looking for work, and total weeks worked is reduced by 10%. By contrast, workers initially earning more than $15 per hour see comparable long-run earnings losses driven primarily by reductions in hourly wages. We interpret these effects through a dynamic job-ladder model that implies flow rents from holding a full-time low-wage job are at least 5% of the wage.