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The Layoff Rat Race

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We investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs. After investments are made, firms may have to lay off workers, and will do so in inverse order of the profit that each worker generates. Greater skill investments, especially in specific human capital contribute more to a firm's bottom line, so that workers who make those investments will be laid off last. We show that, as long as workers' bargaining positions are not too weak, to reduce layoff probabilities, workers invest in specific human capital. Indeed, workers over-invest in skill acquisition from a social perspective whenever their bargaining power is strong enough, even though they only receive a share of any investment. More generally, we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms, the probability that a firm downsizes, and the distribution of employment opportunities in the economy.

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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp07-06.

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Length: 20
Date of creation: May 2007
Date of revision:
Handle: RePEc:sfu:sfudps:dp07-06

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Keywords: Human Capital; Layoffs; Unemployment; Specific Skills; Bargaining;

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  1. Gueorgui Kambourov & Iourii Manovskii, 2009. "Occupational Specificity Of Human Capital," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 63-115, 02.
  2. Waldman, Michael, 1990. "Up-or-Out Contracts: A Signaling Perspective," Journal of Labor Economics, University of Chicago Press, vol. 8(2), pages 230-50, April.
  3. Robert Gibbons & Michael Waldman, 1999. "A Theory Of Wage And Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1321-1358, November.
  4. Robert Gibbons & Michael Waldman, 2006. "Enriching a Theory of Wage and Promotion Dynamics inside Firms," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 59-108, January.
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