Losing a job and being unemployed for a long time ranks among life’s most stressful events, alongside divorce or the death of a loved one.
The impacts extend beyond emotional and physical strain. Long-term unemployment can set back careers and finances permanently. Job skills fade, making workers less employable, and early-career layoffs especially harm lifetime earnings by blocking opportunities to climb the career ladder.
Economists have struggled to fully explain the persistence of these “scarring” effects, making it hard to design effective policies to reduce the harm of mass layoffs during recessions.
Straining the market
Research from Harvard University sheds new light on the issue, showing how mass layoffs do more than hurt individual workers—they strain entire labor markets. When large companies lay off many employees, these workers flood the job market, creating fierce competition and pushing down wages for both job seekers and those still employed.
This oversaturation weakens workers’ bargaining power, reducing wages and limiting job mobility. Young and less-experienced workers are hit hardest, as fewer opportunities to switch jobs during their formative career years stunt their growth and long-term earning potential.
“Your 20s and 30s are critical for building a foundation for your career,” the researchers explain. “If you’re laid off early on or struggle to find work, it can hold back your development and potential for decades.”
Temporary relief
Governments often respond to layoffs with short-term unemployment benefits, which provide temporary relief but can’t replace the security of steady work. An alternative is subsidizing jobs to prevent layoffs. For example, during the COVID-19 pandemic, the U.S. spent $800 billion on the Paycheck Protection Program (PPP) to help small businesses keep employees on payroll. PPP saved millions of jobs but faced criticism for inefficiencies, including funds going to wealthy business owners and fraud.
Other countries, such as Germany and Japan, use “short-time work” programs like Germany’s Kurzarbeit, where workers stay employed with reduced hours. These policies aim to soften the blow of recessions without locking in inefficiencies. Poorly designed programs, however, risk propping up failing firms and harming long-term growth.
“Policymakers should slow down layoffs to let the labor market adjust more smoothly but avoid keeping unviable jobs or firms afloat,” the researchers caution.
Striking the balance
Finding the right balance between unemployment insurance and job retention subsidies is key. The U.S. currently leans heavily on unemployment benefits, but future policies might save more jobs and reduce overall harm by emphasizing retention efforts.
“A dollar spent now on saving jobs can prevent much greater damage down the line,” the researchers note. However, the costs of these programs must match the benefits to avoid overspending.
The study provides a foundation for designing policies that reduce the economic and personal toll of layoffs, helping workers weather tough times and return to productive careers more quickly.
