Heterogeneity among Displaced Workers

We combine post-displacement survey data with information from a displacing firm's personnel files in order to reveal sources of worker heterogeneity in search time and wage losses. First, we detail how experience-related characteristics affect workers' labour market careers during a period of three years after the bankruptcy of the firm. We find that wage losses are large. Interestingly, firm, rank, or job tenure do not explain observed wage differences. Idiosyncratic ability, job rotations prior to displacement, and differences in pre- and post-displacement job characteristics contribute most to observed variations in wages. The individual post-displacement labor market histories allow for testing the Blanchard-Diamond (1994) ranking model for which we find no support. We then develop a dynamic reservation wage updating model. The method of updating is based on the simple idea that job seekers are informed about successful matches of their former colleagues (Rees, 1966; Granovetter, 1974). The model fits the data well.