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When Are Layoffs Acceptable? Evidence From A Quasi-Experiment

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  • Charness, Gary B
  • Levine, David I. I.

Abstract

Many authors have discussed a decline in internal labor markets and an apparent shift to a new employment contract, characterized by less commitment between employer and employee and more portable skills. These discussions occur without much evidence on what employment contract employees currently feel is fair. We performed quasi-experimental surveys to study when employees in the U.S. and Canada feel that layoffs are fair. Layoffs were perceived as more fair if they were due to lower product demand than if the result of employee suggestions. This result appears to be solely due to norms of reciprocity (companies should not punish employees for their efforts), rather than norms of sharing rents, as new technology was also considered a justification for layoffs. Consistent with theories of distributive and procedural equity, layoffs were perceived as more fair if the CEO voluntarily shared the pain. CEO bonuses due to layoffs lowered their reported fairness only slightly. Respondents in Silicon Valley were not more accepting of layoffs than were those in Canada on average, although the ustifications considered valid differed slightly.

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Bibliographic Info

Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt4vs7h4hh.

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Date of creation: 01 Apr 2000
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Handle: RePEc:cdl:ucsbec:qt4vs7h4hh

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Keywords: fairness; layoffs; employment contract;

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  1. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard, 1986. "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, American Economic Association, vol. 76(4), pages 728-41, September.
  2. Akerlof, George A & Yellen, Janet L, 1990. "The Fair Wage-Effort Hypothesis and Unemployment," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 255-83, May.
  3. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers 92-199, University of California at Berkeley.
  4. MacKenzie, Scott B. & Podsakoff, Philip M. & Fetter, Richard, 1991. "Organizational citizenship behavior and objective productivity as determinants of managerial evaluations of salespersons' performance," Organizational Behavior and Human Decision Processes, Elsevier, vol. 50(1), pages 123-150, October.
  5. Levine, David I, 1993. "Fairness, Markets, and Ability to Pay: Evidence from Compensation Executives," American Economic Review, American Economic Association, vol. 83(5), pages 1241-59, December.
  6. David Card & Richard B. Freeman, 1993. "Introduction to "Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States"," NBER Chapters, in: Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States, pages 1-20 National Bureau of Economic Research, Inc.
  7. David Card & Richard B. Freeman, 1993. "Small Differences That Matter: Labor Markets and Income Maintenance in Canada and the United States," NBER Books, National Bureau of Economic Research, Inc, number card93-1, July.
  8. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July.
  9. Chaness, G. & Levine, D.I., 1999. "Changes in the Employment Contract? Evidence from a Quasi-Experiment," Papers 70, California Berkeley - Institute of Industrial Relations.
  10. Dial, Jay & Murphy, Kevin J., 1995. "Incentives, downsizing, and value creation at General Dynamics," Journal of Financial Economics, Elsevier, vol. 37(3), pages 261-314, March.
  11. Gary Charness, 1996. "Attribution and reciprocity in a simulated labor market: An experimental investigation," Economics Working Papers 283, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 1997.
  12. Gorman, Raymond F & Kehr, James B, 1992. "Fairness as a Constraint on Profit Seeking: Comment," American Economic Review, American Economic Association, vol. 82(1), pages 355-58, March.
  13. Akerlof, George A, 1982. "Labor Contracts as Partial Gift Exchange," The Quarterly Journal of Economics, MIT Press, vol. 97(4), pages 543-69, November.
  14. Campbell, Carl M, III & Kamlani, Kunal S, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 759-89, August.
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