Abstract
High-tenure workers losing their job experience a large and prolonged fall in wages and earnings. The aim of this paper is to understand and quantify the forces behind this empirical regularity. We propose a structural model of the labor market with (i) on-the-job search, (ii) general human capital, and (iii) firm-specific human capital. Jobs are destroyed at an endogenous rate due to idiosyncratic productivity shocks and the skills of workers depreciate during periods of non-employment. The model is estimated on matched employer-employee data from Germany. By jointly matching moments related to workers’ mobility and wages, the model can replicate the size and persistence of the losses in earnings and wages found in the data. We find that the key driver of post-displacement wage losses is the loss of a job with a more productive employer.