The first few years in the labor market are crucial in the development of a worker.s career. However, this is the stage when workers have the highest rate of job loss and lose most in recessions. In fact, current estimates for the United States show that an early job loss has large and persistent negative consequences for wages of both young men and women. Similarly, it appears that young American workers suffer long-term negative consequences from entering the labor market in a recession. These findings together imply that young workers are potentially at high risk of long-term adverse consequences from shocks unrelated to their own characteristics or choices in a crucial phase of their careers. Persistent effects of early labor market conditions also pose an important challenge to standard models of labor market dynamics based on human capital theory. Alternative models based on selective accession and separation of workers from firms on job search potentially imply important biases for simple estimates of the cost of early career shocks. However, too little is as of yet known about job and wage dynamics of young job losers and the role of firms to provide a thorough assessment of alternative channels. This proposal outlines a research agenda that attempts (1) to quantify the degree of persistence of early labor market experiences free from confounding factors due to sorting and selection; (2) to provide a detailed analysis of the channels through which persistent wage losses occur, with particular emphasis on job mobility, job attachment, and firm characteristics; and (3) to use this information to assess the relative importance of job mobility and human capital accumulation in young workers. careers. The project aims at improving understanding of how job losses affect young workers. careers; advance how economists characterize wage and employment dynamics; compare the labor markets of two major developed economies; and provide new tools for analyzing a rich source of data that so far has been underexploited. It thus strives to provide answers to an important policy question, as well as to set the stage for an assessment of the relevance of different models of early job and wage mobility. To do so, the project proposes to study the long term effects of an early job loss on career outcomes using a new large matched employer-employee data on wages and career histories from German social security records. This unique data currently not available in the United States provides detailed longitudinal information on both firms and workers. It allows for complex and innovative research strategies that are able to exploit multiple features of both theoretical and statistical models to obtain identification. In particular, the core identification strategy is to control for the biases from negative selection and voluntary mobility uses shocks to firms. labor demand as measured by changes in retention rates of young apprentices as instrument for mobility rates at the end of training. To control for selective initial sorting of workers into firms, it compares job losers with similar workers at the same training firm. The intellectual merit of this project is to use persistent wage and employment effects of early job losses to assess the role of different aspects of the labor market in shaping young workers. careers. The wealth of information available in the German data allows for estimation of the causal effects of job displacements on earnings free potential confounding influences. In response to a common theme in referees. reactions, the project will also put particular emphasis on using the data to provide a thorough characterization of the incidence and true effects of job loss on other career outcomes. In particular, the project will exploit the available information on career patterns to characterize the dynamic adjustment process within and between jobs following a displacement; it will also use the longitudinal information on establishments to analyze the role of firm characteristics in shaping the losses and opportunities of young job losers. The characterization of the persistent effects of early shocks is then particularly suited to assess the relative role of job mobility and job stability in career development. The broader impact of the proposed research consists of a considerable benefit to society by analyzing how a particular group of individuals bears a disproportionate cost of labor market adjustments that are natural in the course of the business cycle. While these adjustments clearly benefit society, its negative consequences may be long lasting and leave scars of economic disadvantage that run through entire cohorts. By assessing the underlying sources of such persistent effects of initial conditions, the project provides implications of how policy could help the re-integration into employment of young displaced workers. In addition, the experience with the matched panel of workers and establishments from Germany will enhance the creation and use of similar data products in the U.S. It will also enhance Infrastructure for Research and Education by building a lasting cooperation with the research department of the German social security institute and providing access of confidential data to American researchers through a new research center.
