Permanent Layoffs in Canada | Only around 40% are “rare” events, particularly among older workers

A new study by Statistics Canada by Garnett Picot, Zhengxi Lin and Wendy Pyper uses a new longitudinal data source on the separations of workers to address three issues:

First, has there in fact been an increase in the permanent layoff rate in Canada in the 1990s, as one might anticipate given concerns about rising job instability?

Second, what are the underlying causes of most permanent layoffs? The paper explicitly examines the role played by cyclical variation in aggregate demand, variation in industrial demand which is often associated with structural change, and differences in layoff rates by firm size which is in turn associated with the birth and death process of firms.

Third, with this as background, the core of the paper asks a question of concern to policy analysts: are most permanent layoffs rare events for workers, or are they a continuation of a pattern of repeat layoffs? This is important because a worker who is confronted with a layoff which is a rare event will require very different post-displacement adjustment assistance from someone whose history of employment has been marked with frequent layoffs, suggesting an inability to hold a job or demand-side instability in the firm or industry in which the person has worked. The workers’ employment history over 10 years is used to explore the relationship between permanent layoff history and the probability of being laid off.

Source: statcan.gc.ca

Findings

Permanent layoffs are an on-going feature of a market economy in which there is “creative destruction”. Workers are being laid off and hired in large numbers, more than a million per year, in all years, no matter in which part of the business cycle. Increases in permanent layoffs are not the defining feature of a recession in the way that a rise in temporary layoffs or a decline in hirings and quits are. Permanent layoffs are much less cyclically sensitive than are the other methods firms use to adjust their workforce in the face of a decline in product demand (i.e., temporary layoffs, quits and hires). This is as true in the early 1990s as in the 1980s.

And there is no evidence that permanent layoffs played a larger role (relative to temporary layoffs) in firms adjustments to changing demand in the 1990s recession than during the 1980s recession.  The permanent layoff rate was if anything lower in the early 1990s than the early 1980s, after controlling for gender, age, province, firm size and industry.

Thus, a decline in aggregate demand, as manifested in recessions, is not the principle cause of permanent layoffs. Another often mentioned candidate is structural change, as reflected by declining labour demand and employment in some industries, and increasing demand in others. Here again, however, we found little evidence to support the notion that the level of permanent layoffs is related to such changes in employment. There was no correlation between changes in net employment in an industry, and the layoff rate. Some declining industries have the lowest layoff rates, while some expanding sectors have the highest. There are other aspects within an industry that determine the layoff rate. These aspects are probably related to the level of gross job gain and loss at the company level in an industry, independent of the changes in aggregate demand that are occurring in the industry. For example, permanent layoffs are highly concentrated in the small firm sector, where the volatility of employment at the company level is the greatest. Workers in small firms are three times more likely to face permanent layoff than their counterparts in large companies.

But for public policy, it is important to know whether the layoff faced by workers is the continuation of a string of repeat layoffs, or whether it is a rare event. The public policy response to a job displacement will be very different for the rare event than for the repeat layoff. In the former, methods of finding a new job may be foremost in any program; whereas in the latter, methods of keeping a job may be more important.

In Canada, only around 40% of layoffs in any given year are “rare” events. Thus, it is not reasonable to think of all worker displacements as being of this nature. There is a significant minority of workers, around 15% in any given year, for whom repeat layoffs are the norm. These workers experience more than five layoffs a decade, on average. The data suggest that long-term earnings (annual average over a decade) to a great extent distinguishes workers for whom layoffs are rare events from others. Among workers with high potential income (as demonstrated by past history), a layoff is very likely to be a rare event.

This is particularly true among older workers. For these people, the issue is one of finding the next job, not one of dealing with a sequence of job displacements. This is not the case among younger, low income displaced workers, where keeping a job may be more the issue. Generally speaking, where one works, as defined by industry and firm size, does not influence the likelihood that an observed layoff will be a “rare” or “repeat” event as much as age, gender and long-term income, even though the probability of layoffs at any given point in time varies significantly across industries and firm size. This is likely due to the high degree of worker mobility among industry and firm size.

This pattern of repeat layoffs may be related to demand side features, such as the more volatile labour demand for low skilled workers, the hiring and layoff practices of some firms, and the instability of employment in particular firms in a sector. It may also be related to supply side characteristics, such as the skill levels, motivation or work habits of the workers. There is nothing in our analysis that can distinguish between these sets of possible reasons for the patterns observed. It is evident, however, that not all worker
displacements can be observed in the same light from a public policy perspective.

via Permanent Layoffs in Canada: Overview and Longitudinal Analysis : Product main page.