Wage scars: The ongoing effects of redundancies and how to alleviate them

Displaced workers often struggle to earn as much as they should be for years following a downsizing event. New data explores the connection, exposing surprising reasons for the deflated earnings.

Redundancies have been increasing steadily since the 1970s – with certain peaks and valleys along the way. For many, they have become almost a default response to periods of economic uncertainty, of which the COVID-19 pandemic is just the latest example.

In recent times, redundancies have been dotting headlines at what feels like an unusually high frequency. From Spotify’s recent decision to let go of 17 per cent of its workforce to similar moves at Microsoft, Amazon, and Hasbro.

On a more local scale, there have been recent downsizing events at PwC, NAB, Services Australia, and Qantas, just to name a few. Experts have estimated that this year, around a third of Aussie businesses will be letting go of some staff.

Wage scars and the importance of workforce re-entry

After being laid off, earnings can suffer for years to come. New research from the e61 Institute has found that the losses, dubbed “wage scars”, are the result not of lower paying subsequent work but of spending less time in those new roles. When displaced workers can get back into long-term roles within a year, the scarring is far less detrimental and persists for a shorter time.

After a mass downsize, such as those experienced as a consequence of the global financial crisis (GFC), wage scars can plague workers for years to come. As late as 10 years after being laid off, displaced workers earn, on average, 10 per cent less, though this is markedly lower than the 27 per cent decrease in earnings one year after displacement, and 16 per cent after five years.

“In dollar terms, the average displaced worker experiences a wage loss of $15,000 in the first years after the mass lay-off event. Their wages never recover to their pre-displacement trajectory in the following 10 years, remaining approximately $5,000 per annum lower than otherwise,” explained e61 Institute research director Dr Gianni La Cava.

Surprisingly, the deflated earnings have less to do with being paid less in subsequent roles and more to do with how quickly displaced workers can get back into long-term work. This phenomenon is unique to Australia.

“The loss of income due to job loss in Australia is similar to other countries. However, the key insight is that wage scars for Australian workers are about those who lose their jobs having trouble finding stable work,” explained e61 Institute research manager Dr Matt Nolan.

Wage scarring among displaced workers who manage to return to long-term work within a year disappears within four years. Compared with the, at least, decade-long wage scars among those slower to return, the difference is considerable.

“The research highlights the importance of good job opportunities as a means to limit the long-term costs of job loss,” said Dr Nolan.

“During the next economic slowdown, the role of monetary policy to support overall demand will be essential in providing these opportunities – and preventing these long-term costs for those who lose their job.”

Getting back out there

Unless Australia’s recently displaced workers can get back into long-term work relatively quickly, large swathes of the working population may be subjected to ongoing wage scarring.

As noted in the Harvard Business Review (HBR), it is among the most professionally traumatic experiences one can go through. Bouncing back into meaningful long-term work can be made even harder by persistent negative feelings.

The emotional and professional challenges implied by a redundancy can be affected by how management handles it. As with most changes, effective management comes down to ongoing, transparent communication.

To best handle a lay-off, Gartner recommends employers should do the following:

1. Confirm redundancies are the right choice.
2. Do it in one fell swoop.
3. Prepare managers to deliver the news.
4. Be mindful of the effects on diversity, equity, and inclusion (DEI).
5. Be as transparent as possible.
6. Make communication a two-way street.
7. Designate a special total rewards team.
8. Pay attention to your remaining employees.