The welfare costs of worker displacement

Recent work has documented the large persistent earnings losses associated with the displacement of high tenure workers. In this paper, we assess the welfare costs of this risk, assuming that workers do not have access to insurance markets. We find that the cost is substantial, on the same order of magnitude as the cost associated with unemployment risk. We also argue that long duration unemployment insurance is likely to exacerbate this cost, and that government-financed severance payments are a far more effective way of dealing with the displacement risk.