Choosing a Control Group for Displaced Workers

Abstract

The vast majority of studies on the earnings of displaced workers use a control group of never-displaced workers to examine the effects of initial displacement. This approach attributes earnings declines associated with all future job instability to the initial displacement event, overstating the losses relative to the average treatment effect. In this article, the author’s approach isolates the impact of an average displacement without conditioning on future displacement status in the control group. In comparisons of the standard and alternative approaches using Panel Study of Income Dynamics (PSID) data, the estimated long-run earnings losses fall dramatically from 25% to as low as 5%.