RDP 2024-09: The ‘Clean Energy Transition’ and the Cost of Job Displacement in Energy-intensive Industries 4. Results

The cost of job displacement in energy-intensive industries on average across countries

On average across the countries considered in our analysis, workers displaced from energy-intensive industries have significantly higher earnings losses than those displaced in the rest of the economy (Figure 2). In the initial year following mass layoff, displaced workers in the rest of the economy lose about 52% of earnings compared to similar non-displaced workers, while workers displaced in energy-intensive industries lose 58% on average. Earnings losses partly converge with those of non-displaced workers in subsequent years, but differences in earnings losses between workers energy-intensive industries and the rest of the economy remain persistent. Even six years post-displacement, earnings losses are 26% in energy-intensive sectors compared with 18% in low energy-intensive sectors. On average over the six years following displacement, earnings losses are 7 percentage points higher in energy-intensive sectors than in the rest of the economy (which corresponds to a 24% difference in proportional terms).

However, there are important differences within the energy-intensive sector between sub-sectors. For example, the largest losses are observed in heavy manufacturing, where workers lose 38% of their earnings relative to non-displaced workers on average over the six years following job loss. In contrast, in transport the average earnings losses over the six years following displacement are similar to those in the rest of the economy. While the average losses following displacement in the energy supply sector are also larger than in the rest of the economy, they are not statistically. This partly reflects larger confidence intervals due to small sample sizes (see Figure 2) and partly heterogeneity in the direction and size of earnings losses across countries (see the next sub-section).

Overall, our aggregate results across countries suggest that displacement in energy supply and heavy manufacturing is associated with substantially higher costs than those in other sectors, including transport. These results are mirror those in OECD (2024_[1]) and echo findings from Barreto, Grundke, & Krill (2023_[9]), which also demonstrate that workers displaced from carbon-intensive industries in Germany, overlapping entirely with energy-intensive industries used here, experience higher costs of job displacement compared to other sectors. For energy-supply workers, the results are in line with previous findings for displaced workers in the coal sector. For example, Haywood, Janser, & Koch (2023_[13]), Andrews, Dwyer and Vass (2023_[14]) and Rud et al. (2022_[15]) find elevated earnings losses for displaced coal workers in respectively Germany, Australia and the United Kingdom.

The cost of job displacement in energy-intensive industries by country

Differences in the size of earnings losses between workers in energy-intensive industries and those in the rest of the economy can differ across countries and specific energy-intensive industries. For ease of exposition, the size of the effects is compared across countries and industries by focusing on the average effects of job displacement during the six years following job displacement. The results are summarised in Figure 3.

There is wide variation across countries in the difference in average earnings losses between energy-intensive sectors and the rest of the economy.^[17] For example, workers in the energy-intensive industries of Spain have on average about 15 percentage points higher earnings losses than workers from the rest of the economy, closely followed by France with a difference of 13 p.p.. With less than 5 p.p., differences in the earnings losses over six years following displacement are particularly small in Australia, Canada, Germany, the Netherlands, Portugal and Sweden.

There are also important differences in the pattern of earnings losses across energy-intensive industries between countries. For instance, in energy supply, earnings losses are 28 p.p. larger in Hungary than the rest of the economy, but about 10 p.p. smaller in Norway and Sweden. This may in part reflect particularities in the national energy mix, as Sweden pre-dominantly produces energy through renewables, whereas Hungary relies predominantly on energy generation through fossil fuels (IEA, 2024_[16]).^[18] In heavy manufacturing, earnings losses for displaced workers are 26 p.p. higher than the rest of the economy in Estonia, while in Australia they are 11 p.p. lower. Even though our previous aggregate findings suggest that there are no elevated earnings losses in the transport sector, there are notable differences within specific countries. For example, transport workers in France face earnings losses nearly 13 p.p. higher than those in in the rest of the economy, whereas in Germany, displaced transport workers face about 6 p.p. lower losses than those in the rest of the economy.

The sources of earnings losses in energy-intensive industries by country

Earnings losses following displacement stem from different underlying causes, that can vary in importance by country and sector. Decomposing the earnings losses after job displacement into their contributing factors – namely (i) being out of work for an entire year, (ii) fewer days worked, conditional on being employed at some point during the year,^[19] and (iii) lower daily wages upon re-employment – can thus shed light on the underlying drivers of job displacement costs for workers in energy-intensive industries and the rest of the economy. Figure 3 provides a decomposition of average earnings losses in energy-intensive sectors over a six-year period compared to the rest of the economy.

Larger earnings losses due to job displacement in energy-intensive sectors mainly reflect weaker re-employment outcomes, notably differences in the number of days worked and re-employment wages rather than differences in the likelihood of being in employment. However, these margins differ considerably across countries. In France, significant differences in earnings losses are primarily driven by differences in days worked, whereas in Austria and Spain, all three components contribute more or less equally to the elevated in earnings losses in energy-intensive industries. The Netherlands stands out as differences in employment probabilities reduce rather than increase the gap in earnings losses between displaced workers in energy-intensive and the rest of the economy.

The sources of differences in earnings losses differ to some degree across energy-intensive sectors. In energy-supply, earnings losses are on average driven in equal parts by differences in employment, days worked, and re-employment wages, though there is considerable variation across countries. For example, days worked explain virtually nothing of the differences in earnings losses in Sweden. In heavy manufacturing, the contribution of employment, days worked and re-employment wages is of roughly equal to that in energy-intensive industries as a whole, while re-employment wages play a relatively small role in the differences in earnings losses in Denmark, Hungary, and Sweden. In transport, there is strong variation in the contributing factors to differences earnings losses across countries. For example, transport workers in France experience earnings losses that are for the most part driven by differences in employment and days worked, while German transport workers see higher re-employment wages after displacement.

Firm- and worker-related wage losses in energy-intensive industries by country

Wage losses in re-employment are an important part of the differences in earnings losses between energy-intensive sectors and the rest of the economy, contributing on average to about a quarter of the overall difference in earnings losses. The origin of these wage losses can stem from firm-related losses due to foregone firm wage premia and worker-related losses due to human capital depreciation and lower match quality (Lachowska, Mas and Woodbury, 2020_[7]). The results are summarised in Figure 4.

Higher wage losses in energy-intensive sectors tend to be firm-related. This may indicate that workers in energy-intensive sectors may undergo larger earnings losses in part because they were displaced from higher paying firms. These may be either firms that are more productive, capture more rents, or compensate workers for physically demanding working conditions by paying higher wages (Card et al., 2018_[17]; Sorkin, 2018_[18]; Hirsch and Mueller, 2020_[19]). Differences in worker-related wage losses either tend to be small or negative (i.e. lower in energy-intensive industries). Only in Finland and Portugal, are larger wage losses in energy-intensive industries mainly worker-related.

The importance of firm-related wage losses to differences in re-employment wages in energy-intensive industries tends to be driven by heavy manufacturing, while in energy supply, wage losses tend to reflect worker-related rather than firm-related factors. In transport, wage losses due to job displacement tend to be smaller than in the rest of the economy due to smaller worker-related wage losses. While the pattern for heavy manufacturing is strikingly consistent across countries, the patterns for energy supply and transport are more mixed.

The effects of job displacement on job mobility in energy-intensive industries

The clean energy-transition and its potential impact on employment in energy-intensive industries may mean that displaced workers find it harder to find another job in the same sector, occupation or region. However, switching sector or occupation may entail significant additional costs due to the loss of occupation- and sector-specific human capital (Huckfeldt, 2022_[20]; Barreto, Grundke and Krill, 2023_[9]). Changing region, by contrast, may enhance employment opportunities, potentially mitigating earnings losses after displacement (Arntz, Ivanov and Pohlan, 2022_[21]). Regional mobility from rural to urban areas in particular may also help mitigate the earnings losses of job displacement (Huttunen, Moen and Salvanes, 2018_[22]; Meekes and Hassink, 2019_[23]). To understand how mobility patterns interact with the cost of job loss in energy-intensive sectors, Figure 5 presents the effect of job loss on the likelihood of switching sectors, occupations and regions in energy-intensive and non-energy-intensive industries on average over six years following job loss.

Workers in energy supply and heavy manufacturing are more likely to change sector and occupation after displacement than workers in non-energy-intensive industries (Figure 5). This may reflect the structural decline in employment in those sectors. The higher incidence of switching sectors and occupations and the associated loss of sector-specific human capital may help explain why displaced workers in those sectors tend to suffer larger earnings losses and weaker re-employment outcomes. In contrast, workers displaced in transport are less likely to change occupations and sectors than workers displaced in non-energy-intensive industries as well as the other energy-intensive industries. This indicates that displaced workers in transport find jobs that are similar to those from which they were displaced and in turn may explain why they experience lower earnings losses. Strikingly, regional mobility does not significantly differ across energy-intensive industries and the rest of the economy.

Potential mechanisms behind within-country differences in earnings losses

Although the costs of job displacement are estimated by comparing observationally comparable displaced and non-displaced workers before and after mass-layoff events, there can still be significant differences between displaced workers from energy-intensive industries and those from other sectors in the economy. This raises the question to what extent differences in the composition of firms and workers between industries contribute to the variation in job displacement costs. To determine the extent of these composition effects on the differences in job displacement costs within countries, Figure 6 presents an Oaxaca-Blinder decomposition that takes into account both individual and firm characteristics.

The composition of workers and firms is a key determinant for the differences in the costs of job displacement between each of the energy-intensive sectors and the rest of the economy, explaining at least half of the differences earnings losses. In each of the energy-intensive industries, displaced workers tend to be older, have lower levels of portable skills (as measured by the worker-related component of wages) and tend be employed in firms that offer high wages, conditional on worker skills, which are lost upon re-employment. The main reason why displaced workers in transport do not experience higher earnings losses than displaced workers in the rest of the economy appears to be related to tenure. Whereas displaced workers in heavy manufacturing and energy supply tend to have somewhat higher tenure than displaced workers in the rest of the economy, contributing to higher earnings losses, in transport displaced workers tend to have shorter tenures relative to other energy-intensive sectors as well as the rest of the economy, reducing earnings losses.

Footnotes

A negative bar indicates that earnings losses are on average higher for those in energy-related industries over a 6-year period. [17]

A higher share of renewables in the energy mix may mean that there is less of a reason for mass layoffs in the clean energy transition. In contrast, a larger share of fossil fuels in the energy mix would require a stronger degree of restructuring of energy systems to realize the clean energy transition, leading to more job displacement and potentially adverse labour market outcomes compared to workers in non-energy-related industries. [18]

Differences in days worked in the first year after displacement are mainly related to the return to employment later in the year (i.e. after 1 January), whereas differences in subsequent years mainly reflect lower job stability upon re-employment. [19]