Skill mismatch and the costs of job displacement.

Establishment closures have lasting negative consequences for the workers displaced from their jobs. We study how these consequences vary with the amount of skill mismatch that workers experience after job displacement. Developing new measures of occupational skill redundancy and skill shortage, we analyze the work histories of individuals in Germany between 1975 and 2010. We estimate difference-in-differences models, using a sample of displaced workers who are matched to statistically similar non-displaced workers. We find that displacements increase the probability of occupation change eleven-fold. Moreover, the magnitude of post-displacement earnings losses strongly depends on the type of skill mismatch that workers experience in such job switches. Whereas skill shortages are associated with relatively quick returns to the earnings trajectories that displaced workers would have experienced absent displacement, skill redundancy sets displaced workers on paths with permanently lower earnings. We show that these differences can be attributed to differences in mismatch after displacement, and not to intrinsic differences between workers making different post-displacement career choices. • We ask how workers' post-displacement skill mismatch affects their long-run earnings losses. • We find that displacements greatly impact the probability of occupation change but not the skill direction of the job switch. • Moving to more skill-demanding jobs (skill shortage) helps workers eventually return to their counterfactual earnings. • Skill redundancy sets displaced workers on paths with permanently lower earnings. • Yet, the career strategy associated with the least losses is staying in the pre-displacement occupation. [ABSTRACT FROM AUTHOR]

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