Wage scarring and climate risk
My favourite economist, Gulnara Nolan - along with her brilliant colleague Jonathan Hambur and a bunch of wonderful OECD and OECD adjacent researchers - just released a super insightful OECD employment piece on the wage consequences of job loss and its relationship with climate risk.
If you’ve been here before you’ll know I have some interest in wage scarring (wage losses over time due to job loss). And in the Australian context, an insightful piece by the brilliant Elyse Dwyer, Dan Andrews, and Lachlan Vass at e61 had found similar results for coal-fired power plants - which received a shout out in the OECD report.
So what are these pieces of work telling us and why should we care?
tl;dr: Income losses from job loss are greater for those in climate related industries - and those losses are due to workers sorting into lower paid firms after job loss. This does not suggest that marginal reskilling or employment services are sufficient policies but instead that:
There are some individuals earning more due to climate risk now - and the scar is a product of that.
There are individuals who have poor job opportunities when coming out of those jobs - and understanding more about that process is needed to support any transition.
Wage losses from job loss vary
When chatting about wage losses from job loss in the past we gave a high level number - and said that such scarring in Australia was comparable/slightly larger than in Scandinavian countries, but lower than a number of others.
However, when we are looking at a sector specific shock - such as job loss associated with climate change and climate change mitigation - these aggregate scars don’t give us the full picture.
What both the OECD and e61 pieces ask are “do job losses in climate exposed industries lead to different wage scars than other jobs, and why”.
So how do they vary? Lets look at the pictures:
OECD
e61
In both cases, the wage losses for those in the climate exposed industries were larger than in the economy at large. In the OECD piece this was around 10% of prior earnings, in the e61 piece a bit over 20% (for a more intensely exposed sector).
This implies that the proportional decline in wage earnings from job loss for individuals who are exposed to climate change is a bigger number - indicating that as these climate change and climate mitigation policies both occur, these workers will have to disproportionately bear the burden.
So what should we do.
No first, why?
I see you’ve hit the big economic question - “why”. Good shout.
If someone loses their job in many circumstances they need to find a new one. This work concentrates on individuals that are clearly attached to the labour market (at least two years in the prior primary job) and who are aged below 50 - so are unlikely to be retiring.
So how can a job loss influence how much you will be paid when in a future job?
The individual worker may accept lower pay at a firm - due to the stress and confidence hit of job loss, or fewer opportunities to work given the stigma of job loss/being unemployed.
The worker may lose skills or knowledge about performing tasks at work, reducing their pay,
The worker may join a firm that pays less to all workers - due to this firm being less risky or less productive.
The worker may join a firm where they are less well matched.
The OECD chapter finds a similar result to most of the published literature for the OECD - that it is sorting into lower paying firms that is the dominant reason for persistently lower wages.
So what does this mean? These firm sorting effects largely imply that this is a transfer rather than an efficiency loss - it isn’t that workers have lost skills, or that workers are moving to firms who they are less well matched to be at. Instead, workers who reenter the labour market are going to firms that pay them less than the firms they were at before.
This is really only the start of the why - we can keep digging.
Is it risk? Risk can show up in two ways - an individual was receiving a premium being at a risky firm, and an individual is willing to take lower pay to be at a safer firm. The chance of experiencing job loss and the reaction to such a shock would then generate a wage difference in the firms you sort between.
Is it a slide down the career ladder? If different firms relate to different points on a “career ladder” (rather than different jobs within a firm), then moving to a lower paid firm may imply moving to an earlier career/lower status firm.
Is it the loss of “rents”/gain in amenities: Was the prior firm very productive and passed that on to everyone in higher pay? Was the prior firm distant from home, awful to work at, or inherently dangerous which required a compensating wage differential?
If this was due to “risk” then this is a product of individuals responding to their new fears about job loss. If it is about career ladders (between firms) then this is an unfortunate switch in position for some workers. Finally, if it is about “lost rents” then those prior jobs were simply paying “too much” relative to the going market rate for a worker - implying either that this was unsustainable, the new job has better non-wage amenities, or that the job opportunities otherwise available are poor.
The OECD work doesn’t really split these points - and to be fair, neither does any of the literature in full. But understanding which is which is something that economists are trying to tease out - as it influences how we view appropriate policy support.
Firm losses and climate exposure
Armed with an understanding of what these wage scars are generated by, we can start to see why climate change exposed industries face greater scarring.
Working in a coal powered power plant, or a lithium mine, is tough but high paying work. A bunch of my old train driver mates would discuss their pay in New Zealand, and how much more they could earn running a shift in Australia at one of the mines.
The decision to take up these mining jobs offered greater job insecurity (risk), worse conditions (very rural, safety and health issues), but high pay.
Working for KiwiRail might come with a greater risk of vehicle failure, but you can stay based in a city, have a secure contract, and can focus on passenger and freight transport. If the Australian option went away the individual would end up with lower pay - but part of that is just due to the improvement in working conditions.
This is NOT pointing us towards the fun solution of “just a bit more training” or even “just a bit more employment support”.
Losses in human capital or excessively quick rematching with jobs are not the driver of the persistent income loss - instead it is about a reduction in job opportunities or loss of good work opportunities in a high paying firm.
This doesn’t invalidate the idea of retraining or support for skills - both pieces of research find greater scarring among those who have not invested in “portable” skills. But we do not know why individuals have selected into not investing in portable skills to start with - for example someone who focused on train driving may find setting up spreadsheets and answering phone intolerable work, and so their skills set and labour market transitions reflect that preference.
Before we can make any policy claim - be it place based policies, training programs, or workplace matching, we would need a better idea of what this good work is and why it isn’t being offered now. The OECD attempts to do this with cross-country comparisons - but given the cross-country differences in policies, I didn’t find their conclusions from the relative scars too convincing. Especially since, given their description, Australian scarring should be very high relative to other countries - and it was not.
So what is it? Is it a lack of labour market competition? Is it lower pay due to a safer workplace, a more flexible job, and closeness to family? Or is it that the job loss reflects a sharp reduction in available jobs (and economic activity) in a region which has reduced job opportunities for that person?
Each of these would point to a very different policy intervention.
And one other point we need to answer but is constantly ignored - do we care more about someone usually earning $150k a year dropping onto a $100k a year job, or someone who generally earns $50k a year only finding work for $40k.
A focus on wage scarring alone would put greater weight on the first - but for many of us it is the second person that really needs the hand up.
Talking about the costs of job loss without thinking through drivers of disadvantage, and the absolute magnitude of the opportunities at hand for people, misses the wood for the trees.
As a result, this is a good start. But unless we’re going to do a lot more work understanding the nature of individual job loss and job opportunities, I find it hard to look past policy that focuses on the basics - making sure we have policy that provides a solid income floor for people, and encourages labour market competition and mobility.
