As anyone who has ever been in the unfortunate position of losing their job can attest, the grief you experience is as emotionally devastating as going through a divorce. It’s often said that a so-called “burning platform” is often an ideal starting point for change as those experiencing the drastic change are left with no choice. That can certainly be the case when it comes to divorces, but it’s less clear cut when it comes to unemployment.

For instance, the skills upon which we used to pride ourselves may have become obsolete. Maybe our entire industry has been disrupted by technology or global competition. Whatever the reason, we may find ourselves in a situation in which there is a mismatch between the skills we have and the skills the market demands. This can be especially likely when the unemployment period drags on.

Significant impact

The scale of the impact was highlighted by recent research from Harvard, which examined who tends to be affected by skill mismatches and the scale of the impact, especially in terms of lost income.

“Our study reveals that the consequences of job displacement extend far beyond immediate job loss. The type and direction of skill mismatch in post-displacement occupations significantly impact workers’ earnings trajectories over time,” the researchers explain.

To understand the nature of skills mismatches, the researchers looked at data on unemployed workers in Germany between 1875 and 2010. All of the displaced workers had lost their jobs not due to any performance-related issues, but rather matters unrelated to their aptitude, such as factory closure. In total, they analyzed around 1.6 million workers.

Loss of earnings

The analysis found a consistent loss of earnings of up to 16.5% a decade after they lost their job. This was compared to their earnings trajectory had they managed to keep their job in the first place.

To try and understand why this loss of earnings materialized, they combined data on education, training, and the tasks performed in over 250 different occupations. This was then analyzed alongside the employment history of German workers gleaned from social security records.

The analysis revealed that periods of economic growth often saw workers moving jobs to those with better pay. These jobs also often required new skills as they were more demanding. The opposite was found to be the case during recessions. There was, however, a significant difference when it came to displaced workers, who were around 12 times more likely to switch occupations than their non-displaced peers.

Switching occupations

To better understand the workers who switched occupations, the researchers divided them into five different groups:

• Those who stayed within the same occupation
• Those who upskilled into new areas with few of their existing skills made obsolete
• Those who downshifted after their skills became obsolete
• Those who reskilled after many of their existing skills were obsolete
• Those who switched laterally to a different field, albeit with similar skills

The analysis revealed that this last group was much more likely to suffer from a loss of earnings than those who stayed. Indeed, after 15 years, those who switched earned over 16% less than those who had remained in their previous occupation, for whom the losses were limited to “just” 8.7%.

“It is interesting—but also sad—to note that, while most displaced switchers either skill down (35%) or up (36%) after displacement, the downskilling sort earned on average 22.4% below their pre-displacement wages, compared to 8.9% for the upskilling sort,” the researchers explain.

It was also evident that those who were able to upskill were able to overcome a temporary loss of earnings and catch up again after around seven years. By contrast, those who downskilled remained consistently behind the wage curve they would have been on had they not lost their job. Despite this, however, those who upskilled still seldom outperformed those who stayed in their occupation.

Skills matter

The findings remind us how important it is to ensure that our skills don’t fall out of step with those demanded by the market. The study shows that mismatched skills are a big issue. People who switched to jobs where their old skills didn’t fit suffered the most. Those who moved to jobs needing more skills had it easier. The authors say that policymakers and companies must help workers adjust to changing job needs.

“Our findings emphasize the importance of avoiding skill mismatch, and in particular, downskilling, which imposes the largest and most persistent costs on workers,” they explain.

There are several solutions to consider. One is to offer ongoing training throughout a person’s working life, which could be supported by personal learning funds. Another idea is to have job centers offer regular career guidance. We could also promote moving to where the jobs are. As is always the case, however, the first step is one of awareness, and the research provides a timely reminder of the importance of skills development, especially among those who are displaced.