Coping with labor market risk: Formal job loss and earnings dynamics in India

This paper examines earnings dynamics of workers following the loss of formal employment, an area relatively underexplored in the context of developing economies like India. Leveraging high-frequency Consumer Pyramids Household Survey data, we document considerable churn in formal sector employment, disproportionately affecting low-productivity workers. Employing a dynamic difference-in-differences framework, we find that displacement from formal employment leads to a sharp and sustained decline in earnings. Contrary to prevailing evidence, workers displaced during COVID-19 downturn experienced a relatively faster earnings recovery than those displaced in pre-COVID period, highlighting their resilience against shock. Further, we find significant heterogeneity in post-displacement earnings losses, with sharper declines for workers from skill-intensive industries and occupations, and limited variation across education or prior earnings levels. Despite self-insurance efforts, formal job displacement results in substantial household income and welfare losses, highlighting the limitations of informal coping mechanisms and the need for public safety nets.