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Employment Dynamics in a Signaling Model with Workers' Incentives

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  • Alison E. Weingarden

Abstract

Many firms adjust employment in a \"lumpy\" manner -- infrequently and in large bursts. In this paper, I show that lumpy adjustments can arise from concerns about the incentives of remaining workers. Specifically, I develop a model in which a firm's productivity depends on its workers' effort and workers' income prospects depend on the firm's profitability. I use this model to analyze the consequences of demand shocks that are observed by the firm but not by its workers, who can only try to infer the firm's profitability from its employment decisions. I show that the resulting signaling model has pooling equilibria in which, for small negative shocks, the firm bears the costs of some labor hoarding in order to conceal negative information from workers and thus maintain their incentives for effort. However, if negative shocks accumulate then labor hoarding becomes too costly; at that point the firm drastically reduces employment.

Suggested Citation

  • Alison E. Weingarden, 2017. "Employment Dynamics in a Signaling Model with Workers' Incentives," Finance and Economics Discussion Series 2017-040, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2017-40
    DOI: 10.17016/FEDS.2017.040
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    More about this item

    Keywords

    Asymmetric information; Displacement; Downsizing; Labor demand; Layoffs; Moral hazard; Signaling;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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