Displacement, asymmetric information and heterogeneous human capital
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.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Altonji, Joseph G. & Blank, Rebecca M., 1999.
"Race and gender in the labor market,"
Handbook of Labor Economics,
in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 48, pages 3143-3259
- Coate, S. & Loury, G.C., 1992.
"Will Affirmative Action Policies Eliminate Negative Stereotypes?,"
3, Boston University - Department of Economics.
- Coate, Stephen & Loury, Glenn C, 1993. "Will Affirmative-Action Policies Eliminate Negative Stereotypes?," American Economic Review, American Economic Association, vol. 83(5), pages 1220-40, December.
- Stevens, Ann Huff, 1997. "Persistent Effects of Job Displacement: The Importance of Multiple Job Losses," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 165-88, January.
- Dennis J. Aigner & Glen G. Cain, 1977. "Statistical theories of discrimination in labor markets," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 30(2), pages 175-187, January.
- Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
- Becker, Gary S., 1971. "The Economics of Discrimination," University of Chicago Press Economics Books, University of Chicago Press, edition 2, number 9780226041162.
- Joseph G. Altonji & Charles R. Pierret, 1997.
"Employer learning and statistical discrimination,"
Working Paper Series, Macroeconomic Issues
WP-97-11, Federal Reserve Bank of Chicago.
- Joseph G. Altonji & Charles R. Pierret, 1997. "Employer Learning and Statistical Discrimination," NBER Working Papers 6279, National Bureau of Economic Research, Inc.
- Joseph G. Altonji & Charles R. Pierret, . "Employer Learning and Statistical Discrimination," IPR working papers 97-18, Institute for Policy Resarch at Northwestern University.
- Gibbons, Robert & Katz, Lawrence F., 1991.
"Layoffs and Lemons,"
3442782, Harvard University Department of Economics.
- Robert Gibbons & Lawrence Katz, 1989. "Layoffs and Lemons," Working Papers 629, Princeton University, Department of Economics, Industrial Relations Section..
- Robert Gibbons & Lawrence Katz, 1989. "Layoffs and Lemons," NBER Working Papers 2968, National Bureau of Economic Research, Inc.
- Gibbons, R. & Katz, L.F., 1989. "Layoffs And Lemons," Working papers 531, Massachusetts Institute of Technology (MIT), Department of Economics.
- Song, Younghwan, 2007. "Recall bias in the displaced workers survey: Are layoffs really lemons?," Labour Economics, Elsevier, vol. 14(3), pages 335-345, June.
- Akerlof, George A, 1976. "The Economics of Caste and of the Rat Race and Other Woeful Tales," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 599-617, November.
- Harry Krashinsky, 2002.
"Evidence on adverse selection and establishment size in the labor market,"
Industrial and Labor Relations Review,
ILR Review, Cornell University, ILR School, vol. 56(1), pages 84-96, October.
- Harry Krashinsky, 2002. "Evidence on Adverse Selection and Establishment Size in the Labor Market," ILR Review, Cornell University, ILR School, vol. 56(1), pages 84-96, October.
- Burdett, Kenneth & Mortensen, Dale T, 1998. "Wage Differentials, Employer Size, and Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(2), pages 257-73, May.
- Laing, D., 1990.
"Involuntary Layoffs in a Model with Asymmetry Information Concerning Worker Ability,"
12-90-4, Pennsylvania State - Department of Economics.
- Laing, Derek, 1994. "Involuntary Layoffs in a Model with Asymmetric Information Concerning Worker Ability," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 375-92, April.
- Phelps, Edmund S, 1972. "The Statistical Theory of Racism and Sexism," American Economic Review, American Economic Association, vol. 62(4), pages 659-61, September.
- Lundberg, Shelly J & Startz, Richard, 1983.
"Private Discrimination and Social Intervention in Competitive Labor Markets,"
American Economic Review,
American Economic Association, vol. 73(3), pages 340-47, June.
- Richard Startz & Lundberg, . "Private Discrimination and Social Intervention in Competitive Labor Markets," Rodney L. White Center for Financial Research Working Papers 19-81, Wharton School Rodney L. White Center for Financial Research.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-08-02. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.