HOW DESTRUCTIVE IS CREATIVE DESTRUCTION? EFFECTS OF JOB LOSS ON JOB MOBILITY, WITHDRAWAL AND INCOME Kristiina Huttunen Labour Institute for Economic Research Jarle Møen Norwegian School of Economics and Business Administration Kjell G. Salvanes Norwegian School of Economics and Business Administration Abstract We analyze short and long-term effects of worker displacement. Our sample consists of male workers displaced from Norwegian manufacturing plants. We find that displacement increases the probability of leaving the labor force by 31%. The drop-out rate from the labor force is particularly high in the first years following displacement. The average earnings effects for those who remain in the labor force are moderate, a 3% loss relative to non-displaced workers after seven years. Splitting displaced workers on within- and between-firm movers, we find that the estimated earnings loss is entirely driven by between-firm movers who experience a 3.6% loss. Transfers to other plants within multi-plant firms upon displacement are quite common. Our results support the view that human capital is partly firm specific and partly industry specific. We find no evidence suggesting that human capital is plant specific. (JEL: J63, J65) 1. Introduction In competitive markets there is a continuous entry and exit of firms. Productive and innovative firms expand and less productive firms downsize. While this process may facilitate an overall market growth, it is important to understand how the process affects workers. Research suggests that the effects of being displaced may be detrimental. The majority of US studies that analyze the costs of involuntary job loss find that earnings and employment losses of displaced workers are large and persistent. 1 For high-tenure workers, earnings losses are estimated to be up to 25% four years after losing the job. The editor in charge of this paper was Orazio Attanasio. Acknowledgments: We would like to thank participants at several conferences and seminars where the paper has been presented. Ragnhild Balsvik gave useful comments to the final draft. We are grateful to Anne Liv Scrase and Marita Kristiansen for proof-reading the manuscript. The project has received financial support from the Research Council of Norway, the Finnish Cultural Foundation, and the Yrj¨ o Jahnsson Foundation. E-mail addresses: Kristiina.Huttunen@labour.fi (Huttunen); jarle.moen@nhh.no (Møen); kjell.salvanes@nhh.no (Salvanes) 1. See surveys by Hamermesh 1987, Fallick 1996, and Kletzer 1998. Journal of the European Economic Association October 2011 9(5):840–870 c  2011 by the European Economic Association DOI: 10.1111/j.1542-4774.2011.01027.x