Reemployment Experiences of Displaced Workers and The Impacts of the Canadian Earnings Supplement Project

Abstract

The Canadian Earning Supplement Project (ESP) was conducted from 1994 through 1996 to test a wage subsidy program that made supplemental payments to individuals who found a new full-time job that paid less than their previous job within 26 weeks of job search. contrary to the optimistic expectations held by researchers and previous studies, the impact of ESP was disappointing. This paper attempts to uncover the reasons why ESP did not have sufficient impact by analyzing the reemployment experiences of ESP participants. I found that the insufficient impacts of ESP could be attributed to the fact that a significant proportion (65 percent) of sample members set initial reservation wages lower than their previous wages. Workers who enjoyed wage premiums in their previous jobs (whether job-specific, industry-specific, or union-specific premiums) were found to have low initial reservation wages. In contrast, workers with high education credentials, white-collar workers, and workers in knowledge-based industries appeared to be not interested in the ESP offer, because they expected no earnings loss and thus no gain in lifetime wealth from receipt of the supplement. To be discordant with the propositions made by past theroretical works on wage subsidy programs, job-search intensity was not the major link through which ESP impacts were channeled. Another important finding is that ESP manifested a significantly large impact on the optimal timing of leaving unemployment, even through its impact on the overall probabililty of leaving unemployment was minuscule.