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Seniority-based layoffs as an incentive device

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  • Joseph A. Ritter
  • Lowell J. Taylor

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.

Suggested Citation

  • Joseph A. Ritter & Lowell J. Taylor, 1998. "Seniority-based layoffs as an incentive device," Working Papers 1998-006, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:1998-006
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    References listed on IDEAS

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    1. Edward P. Lazear & Paul Oyer, 2012. "Personnel Economics [The Handbook of Organizational Economics]," Introductory Chapters,, Princeton University Press.
    2. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, December.
    3. Haltiwanger, John, 1984. "The Distinguishing Characteristics of Temporary and Permanent Layoffs," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 523-538, October.
    4. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
    5. Martin S. Feldstein, 1975. "The Importance of Temporary Layoffs: An Empirical Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 725-745.
    6. Katharine G. Abraham & James L. Medoff, 1984. "Length of Service and Layoffs in Union and Nonunion Work Groups," ILR Review, Cornell University, ILR School, vol. 38(1), pages 87-97, October.
    7. John C. Ham, 1986. "Testing whether Unemployment Represents Intertemporal Labour Supply Behaviour," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(4), pages 559-578.
    8. George A. Akerlof & Hajime Miyazaki, 1980. "The Implicit Contract Theory of Unemployment meets the Wage Bill Argument," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(2), pages 321-338.
    9. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
    10. George A. Akerlof & Lawrence F. Katz, 1989. "Workers' Trust Funds and the Logic of Wage Profiles," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(3), pages 525-536.
    11. Idson, Todd L & Valletta, Robert G, 1996. "Seniority, Sectoral Decline, and Employee Retention: An Analysis of Layoff Unemployment Spells," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 654-676, October.
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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.
    2. Joseph A. Ritter & Lowell J. Taylor, 1997. "Economic models of employee motivation," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-21.

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