Essays on Income and Labor Mobility

This dissertation comprises an introduction chapter and three essays in the fields of public and labor economics. The first essay investigates the decline in Finland’s middle class, while the latter two focus on the effects of job displacements. All the essays are empirical and use high-quality Finnish register data to examine the dynamics of negative shocks that are affecting a population group that at one time earned a living, contributed to society through taxes, and supported businesses through their consumption.

The first essay investigates the decline in Finland’s middle class from 1995 to 2012 and aims to examine how changes in the probabilities of belonging to the middle class in different socioeconomic groups have contributed to this decline while considering changes in these groups’ relative sizes. The results from a decomposition analysis indicate that most of the decline can be attributed to the probability effect, particularly among the least-educated in the population. Changes in the structures of age demographics and educational groups play a smaller role in contributing to the decline. The essay also indicates that the middle-class decline and polarization in Finland are asymmetrically reflected in different education groups, i.e., the highly educated have risen the income distribution, while the least-educated have fallen.

The second essay examines how labor market conditions at the time of graduation affect individuals’ resilience from subsequent shocks later in their careers. Rich administrative register data is used to estimate a dynamic model with three-way interactions, accounting for relative trends and trajectories of the non-displaced, to investigate how individuals graduating in good or bad times recover from displacement after a plant closure. The estimates indicate that university graduates who entered the labor market at an unlucky time face larger earnings losses linked to employment in lower-quality firms following a plant closure. A similar additional negative effect is not found for unlucky vocational school graduates.

The third essay examines the mass layoffs following the decline of Nokia’s mobile phone operations from 2009 to 2012 by utilizing novel data on layoff negotiations. We use rich matched employer-employee register data to compare workers’ recovery after being displaced from Nokia with a matched comparison group of similar workers displaced from other firms. The results suggest that workers displaced from a large firm like Nokia experience a steeper drop in earnings. Those displaced from Nokia were found to be more entrepreneurial, and programs aimed at encouraging entrepreneurship increase the likelihood of establishing a startup among highly skilled workers. In the long run, firms founded by workers displaced from Nokia seem to perform very similarly compared with startups founded by displaced workers from other firms or by other entrepreneurs around the same time.

Collectively, these essays enhance our understanding of a policy-relevant topic: negative shocks’ effects on individuals. First, they examined the evolution of income inequality and mobility in Finland from middle-income households’ perspective. Second, they investigated how negative shocks’ dynamics affected an economically important population group that, at least at some point, was earning a living, supporting other businesses through their consumption, and contributing to the public sector through taxation.