Bad Time to Lose a Job

What impact do financial crises have on wages?

Sangeeta Pratap of CUNY's Hunter College and Erwan Quintin of the Dallas Fed take a look at what happened to pay during the Mexican Tequila Crisis of the mid-1990's, and their conclusion isn't good news for those who have lost, or will lose, their jobs because of the current crisis.

They find that during normal times, people who changed jobs didn't see their wages fall. But during the Tequila Crisis, workers who changed jobs but stayed in the same sector earned about 2.5 percent less than before. The outcome was even worse for those who had to change sectors. These folks saw their pay decline by an additional 6 percent on average.

Pratap and Quintin also don't provide much solace for those who think industrialized countries like the United States or western European nations are less likely to succumb to these forces:

Mexico's experience suggests that labor market adjustments are an important aspect of how financial turmoil ripples through economies. The large gaps between emerging and industrial economies may lead to differences in timing, magnitude and duration, but both are likely to experience significant labor market spillovers from financial distress.