Worker flows and Labour Market Adjustment during the Great Recession: Evidence from a Large Shock

This paper analyzes how the labor market adjusts to the Great Recession. To this aim, we use the
data for Latvia, a country that have experienced one of the most severe recessions in Europe and a
subsequent remarkable recovery. Employing longitudinal EU SILC data and a panel data set
constructed by us from various waves of the Latvian Labour Force Survey (LLFS), we estimate
worker transitions between labor market states. Labor market adjustment takes place predominantly
at the extensive margin since it is driven by flows from permanent wage employment to
unemployment. We also show that older, non-Latvian and above all less skilled workers are
especially hard hit by the economic crisis. Estimated transitions between four mutually exclusive
occupational groups demonstrate that downward mobility is very limited even during the Great
Recession. Finally, wage regressions suggest that job mobility is not associated with increased
labour productivity during and immediately after the crisis.