When 1% of a county’s labour force is laid off, the county’s total labour force shrinks by 0.15 percentage points within three years.
Between 2001 and 2011, internal migration, take-up of disability insurance, and early retirement account for three-quarters of the decline in the labour force following a significant economic downturn, with internal migration accounting for more than half. This is consistent with the findings in Blanchard and Katz (1992). Labour force non-participation accounts for the remaining quarter of the decline.
As the country experienced the Great Recession, patterns of labour force exit changed. Workers were twice as likely to exit the labour force following mass layoffs after the start of the Great Recession than before. Even so, the relative importance of migration as the mechanism for the labour force reduction declined substantially, comprising less than a fifth of all exits from 2007-11.
This implies that the importance of non-participation has grown, accounting for 60% of exits in the period from 2007 to 2011. Non-participants account for a growing segment of labour force exits, yet we know little about their economic activities. A recent article in the New York Times, for example, discussed this phenomenon, but also pointed to how little is known about the daily lives of these non-participants and the reasons for their long-term exits from the labour force (Cox 2014).
Following a mass layoff, applications for disability insurance increase as well, particularly for workers over 55 years old. This finding is driven by a larger response to mass layoffs during the Great Recession. Our results show that this effect can explain five percent of the change in the labour force following a mass layoff.
Finally, we find significant geographic differences in the relative importance of different types of labour force exit. In urban counties, rates of labour force exit are a third as high as in rural counties, reflecting the higher density of employment opportunities in cities. In rural counties, workers were less likely to move away than in urban counties, and were more likely to become non-participants.
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