The cost of job loss in carbon-intensive sectors: Evidence from Germany

Given global efforts to reduce carbon emissions, the shift of labor away from carbon-intensive activities is likely to increase. To shed light on the implied adjustment costs for workers, we use German administrative data from 1992 to 2020 to estimate the cost of involuntary job displacement for workers in high-carbon-intensity (HCI) sectors. Germany is particularly well-suited for this endeavor, as it has been one of the leading countries in carbon emission reductions since 1990, with considerably declining employment in HCI sectors. Comparing labor market outcomes of displaced and non-displaced workers before and after a mass layoff event, we find that workers displaced from HCI sectors face larger and more lasting earnings losses than those displaced from other sectors. This is mainly due to lower wages after re-employment. We show that a large part of the gap in displacement costs is explained by persistent differences in occupation-, firm- and local labor market-related characteristics across sectors, while differences in worker characteristics play a more limited role. Production processes in HCI sectors are regionally concentrated and involve a specific set of occupations and tasks, while firm wage premia are higher. This reduces outside options for finding jobs with similar skill requirements and pay, increasing adjustment costs for displaced workers. Using an alternative method to identify involuntary job separations, we show that our results also apply to more gradual transitions, signaling that adjustment costs could remain significant in a green transition without mass-layoffs.