Job displacement effects and labor market sorting during COVID-19

This paper examines the effects of job loss on workers. Using detailed administrative data from Costa Rica, we use a clustering algorithm to group workers into types based on their employment stability and job search efficiency. Our results show that job displacement leads to persistent earning losses for workers, particularly during economic downturns such as the COVID-19 pandemic. Displaced workers during the pandemic are moving to more productive and higher-paying firms, especially those types with initially higher earnings potentials and stable employment histories. Nonetheless, these workers are also shifting to lower-paying occupations. The findings suggest that changes in job characteristics rather than employer characteristics should be considered to explain earning losses and labor reallocation in the aftermath of the pandemic.