Layoffs and Lemons

Abstract

In this paper we provide theoretical and empirical analyses of an asymmetric -information model of layoffs in which the current employer is better informed about its workers' abilities than prospective employers are. The key feature of the model is that when firms have discretion with respect to whom to lay off, the market infers that laid-off workers are of low ability. Since no such negative inference should be attached to workers displaced in a plant closing, our model predicts that the postdisplacement wages of otherwise observationally equivalent workers will be higher for those displaced by plant closings than for those displaced by layoffs. A simple extension of our model predicts that the average postdisplacement unemployment spell of otherwise observationally equivalent workers will be shorter for those displaced by plant closings than for those displaced by layoffs. In our empirical work, we use data from the Displaced Workers Supplements in the January 1984 and 1986 Current Population Surveys. For our whole sample, we find that the evidence (with respect to both re -employment wages and post-displacement unemployment duration) is consistent with the idea that laid-off workers are viewed less favorably by the market than are those losing jobs in plant closings. Furthermore, our findings are much stronger for workers laid-off from jobs where employers have discretion over whom to lay off, and much weaker for workers laid-off from jobs where employers have little or no discretion over whom to lay off. Robert Gibbons Department of Economics MIT Cambridge, MA 02139 Lawrence F. Katz Department of Economics Harvard University Cambridge, MA 02138 1 . Introduction Since the seminal work of Akerlof (1976) and Spence (1973) , labor economists have understood that asymmetric information about workers' productive abilities can affect labor-market outcomes. A number of recent theoretical papers have elaborated on this theme, and also have shifted attention from a worker's private information (vis a vis prospective employers) about his or her productive ability to an employer's private information (vis a vis the market) about an employee's ability. Waldman (1984), Milgrom and Oster (1987), and Ricart i Costa (1988), for instance, describe inefficient job assignments that result when an employer has private information concerning employees' abilities, and Greenwald (1986), Lazear (1986) , and Riordan and Staiger (1987) describe analogous consequences for wages and mobility in the presence of such asymmetric

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@inproceedings{Gibbons2007LayoffsAL, title={Layoffs and Lemons}, author={Robert Gibbons and Lawrence F. Katz and Laurence M. Ball and David Card and James Dow and Henry S . Farber and Alan B . Krueger and Bruce D. Meyer and Kevin Murphy and Barry Nalebuff and Julio J. Rotemberg and Garth Saloner}, year={2007} }