Wealth After Job Displacement

Income drops permanently after an involuntary job displacement, but it has never been clear what happens to long-run wealth in the United States. This paper concludes that involuntary job displacement has large effects on wealth throughout a worker's lifetime. Upon displacement, wealth falls 14% relative to workers of a similar age and education from the PSID. Their wealth is still 18% lower 12 years after the event. A standard life cycle model calibrated to US data with permanent decreases in income after displacement behaves differently than these findings. The agents in the model also experience a large drop in wealth but they recover. The biggest culprit for these differences is the changes to consumption being small and statistically insignificant in the PSID whereas agents in the model decrease their consumption considerably