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Displacement, asymmetric information and heterogeneous human capital

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  • Luojia Hu
  • Christopher Taber

Abstract

In a seminal paper Gibbons and Katz (1991; GK) develop and empirically test an asymmetric information model of the labor market. The model predicts that wage losses following displacement should be larger for layoffs than for plant closings, which was borne out by data from the Displaced Workers Survey (DWS). In this paper, we take advantage of many more years of DWS data to examine how the difference in wage losses across plant closing and layoff varies with race and gender. We find that the differences between white males and the other groups are striking and complex. The \"lemons\" effect of layoff holds for white males as in the GK model, but not for the other three demographic groups (white females, black females, and black males). These three all experience a greater decline in earnings at plant closings than at layoffs. This results from two reinforcing effects. First, plant closings have substantially more negative effects on minorities than on whites. Second, layoffs seem to have more negative consequences for white men than the other groups. These findings suggest that the GK asymmetric information model is not sufficient to explain all of the data. We augment the model with heterogeneous human capital and show that this model can explain the findings. We also provide some additional evidence suggestive that both asymmetric information and heterogeneous human capital are important. In support of both explanations, we demonstrate that the racial and gender effects are surprisingly robust to region, industry and occupation controls. To look at the asymmetric information, we make use of the Civil Rights Act of 1991 which induced employers to lay off \"protected\" workers in mass layoffs rather than fire them for cause. As a result, relative to whites, a layoff would be a more negative signal for blacks after 1991 than before. If information is important, this would in turn imply that blacks experience a relatively larger loss in earnings at layoffs after 1991 than prior; and that's what we find in the data. In addition, as further evidence for heterogeneous human capital, we document for the first time in the literature that the two types of layoffs reported in the DWS data, namely layoffs due to \"slack work\" and \"position abolished\" have very different features when compared to plant closings. Finally, we simulate our model and show that it can match the data.

Suggested Citation

  • Luojia Hu & Christopher Taber, 2008. "Displacement, asymmetric information and heterogeneous human capital," Working Paper Series WP-08-02, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-08-02
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    References listed on IDEAS

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    1. Gibbons, Robert & Katz, Lawrence F, 1991. "Layoffs and Lemons," Journal of Labor Economics, University of Chicago Press, vol. 9(4), pages 351-380, October.
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    Cited by:

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    2. Roland G. Fryer, Jr. & Devah Pager & Jörg L. Spenkuch, 2013. "Racial Disparities in Job Finding and Offered Wages," Journal of Law and Economics, University of Chicago Press, vol. 56(3), pages 633-689.
    3. Kunze, Astrid & Troske, Kenneth R., 2012. "Life-cycle patterns in male/female differences in job search," Labour Economics, Elsevier, vol. 19(2), pages 176-185.
    4. Jens MohrenweiserBy & Gabriele Wydra-Somaggio & Thomas Zwick, 2020. "Information advantages of training employers despite credible training certificates," Oxford Economic Papers, Oxford University Press, vol. 72(3), pages 651-671.
    5. Asquith, Brian & Goswami, Sanjana & Neumark, David & Rodriguez-Lopez, Antonio, 2019. "U.S. job flows and the China shock," Journal of International Economics, Elsevier, vol. 118(C), pages 123-137.
    6. Emiko Usui & Seik Kim, 2013. "Employer Learning, Job Mobility, and Wage Dynamics," 2013 Meeting Papers 912, Society for Economic Dynamics.
    7. Kim, Taehoon, 2019. "Signaling Effects of Layoffs in South Korea," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 60(2), pages 163-188, December.
    8. William J. Carrington & Bruce Fallick, 2017. "Why Do Earnings Fall with Job Displacement?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 56(4), pages 688-722, October.
    9. Meekes, Jordy & Hassink, Wolter, 2017. "The Role of the Housing Market in Workers' Resilience to Job Displacement after Firm Bankruptcy," IZA Discussion Papers 10894, Institute of Labor Economics (IZA).
    10. Jérôme Adda & Christian Dustmann & Joseph-Simon Görlach, "undated". "The Dynamics of Return Migration, Human Capital Accumulation, and Wage Assimilation," CReAM Discussion Paper Series 2111, Centre for Research and Analysis of Migration (CReAM), Department of Economics, University College London.
    11. Seik Kim & Emiko Usui, 2021. "Employer learning, job changes, and wage dynamics," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1286-1307, July.
    12. Siddique, Zahra, 2008. "Caste Based Discrimination: Evidence and Policy," IZA Discussion Papers 3737, Institute of Labor Economics (IZA).
    13. Rao, Neel, 2016. "Asymmetric information and search frictions: A neutrality result," Economics Letters, Elsevier, vol. 147(C), pages 138-141.
    14. Meekes, Jordy & Hassink, Wolter H.J., 2019. "The role of the housing market in workers′ resilience to job displacement after firm bankruptcy," Journal of Urban Economics, Elsevier, vol. 109(C), pages 41-65.
    15. J. Meekes & W.H.J. Hassink, 2016. "The role of the housing market in workers’ resilience to job displacement after firm bankruptcy," Working Papers 16-10, Utrecht School of Economics.

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    More about this item

    Keywords

    Displaced workers; Discrimination in employment;

    JEL classification:

    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J7 - Labor and Demographic Economics - - Labor Discrimination

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