Insurance against risk? Economic cost and compensation of job loss in different welfare states

Job loss is a common life course event, yet its economic consequences for households across different welfare states are not yet well understood. This paper investigates the cost of job loss to household incomes, and the extent to which initial losses are compensated through the market, within the household and by the social security programmes. Using high quality survey and administrative data from Denmark, Finland, Germany and the UK (1990-2018), we track post-job loss income trajectories using a difference-in-differences design. We find substantial penalties on household incomes, on average around 4-6% of pre-job loss income, that are particularly higher in the UK in the short-term but tend to dissipate over time in all countries. Re-employment emerges as the primary mechanism of compensation in all countries, while the role of household and state compensations vary in line with the national compensation strategies. State compensation is crucial in mitigating immediate income losses, while market compensation becomes more important over time. Household compensation mainly acts as a substitute for other types of compensations and are therefore significantly higher in the UK and Germany where market and/or state compensations are lower compared to the Nordics.