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Seniority-based layoffs as an incentive device

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  • Joseph A. Ritter
  • Lowell Taylor
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    Abstract

    This paper provides a simple economic rationale for two elements that often appear - implicitly or explicitly - in firms' personnel policies. When firms reduce their labor input they often (i) lay off a few individuals rather than adjust work hours, and (ii) make retention decisions on the basis of seniority. We show that in a stochastic environment, a seniority-based layoff policy can have the effect of making the job valuable to a worker over most of her career. This provides work-life incentives using a mechanism similar to Lazear's well known model of upward-sloping wage profiles. Firms reduce their workforce by adjusting employment rather than work hours because layoffs are an integral part the incentive scheme.

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    File URL: http://research.stlouisfed.org/wp/more/1998-006
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    File URL: http://research.stlouisfed.org/wp/1998/1998-006.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-006.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedlwp:1998-006

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    Related research

    Keywords: Labor market;

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    Cited by:
    1. Joseph A. Ritter & Lowell J. Taylor, 1998. "Valuable jobs and uncertainty," Working Papers 1997-005, Federal Reserve Bank of St. Louis.

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