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Separations Revisited: Do Layoffs or Quits Drive Lower Separation Rates in High-Quality Firms?

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Abstract

We challenge the view that the negative correlation between firm quality and separation rates reflects efficient separations. Using Brazilian administrative data, we show that this correlation is driven by lower layoff rates at high-quality firms, not differences in quits. We develop a job search model where wage rigidity and productivity uncertainty generate inefficient layoffs. The model predicts that higherquality firms have larger markdowns and, consequently, fewer layoffs. Empirically, we validate this by showing that firms facing stronger wage rigidity have higher layoffs and a steeper quality-layoff correlation, and that markdowns are higher in better firms and negatively correlated with layoffs.

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  • Cauê Dobbin & Daniel Fernandez & Tom Zohar, 2025. "Separations Revisited: Do Layoffs or Quits Drive Lower Separation Rates in High-Quality Firms?," Working Papers wp2025_2524, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2025_2524
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    References listed on IDEAS

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    1. Webber, Douglas A., 2015. "Firm market power and the earnings distribution," Labour Economics, Elsevier, vol. 35(C), pages 123-134.
    2. McLaughlin, Kenneth J, 1991. "A Theory of Quits and Layoffs with Efficient Turnover," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 1-29, February.
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    JEL classification:

    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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