Replacement Rates and Long-Term Outcomes after Job Displacement

The goal of this paper is to provide a bridge between the job displacement literature that uses long time panel data and similar work with a limited panel. This paper finds that a worker needs to replace 120% of their predisplacement income in the first two years after the event to avoid a long-term fall in income. This marginal replacement rate has variation with lower rates having much larger marginal impacts than higher replacement rates. The two results hold up to several robustness checks and generally align with a standard labor income process that has displacements as a fall in the permanent component of the process. These results provide proper context of how the first job after displacement affects the worker’s later income growth.