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Seniority-based layoffs as an incentive device

Listed author(s):
  • Joseph A. Ritter
  • Lowell J. Taylor

This paper provides a simple economic rationale for two elements that often appear - implicitly or explicitly - in firms' personnel policies. When firms reduce their labor input they often (i) lay off a few individuals rather than adjust work hours, and (ii) make retention decisions on the basis of seniority. We show that in a stochastic environment, a seniority-based layoff policy can have the effect of making the job valuable to a worker over most of her career. This provides work-life incentives using a mechanism similar to Lazear's well known model of upward-sloping wage profiles. Firms reduce their workforce by adjusting employment rather than work hours because layoffs are an integral part the incentive scheme.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-006.

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Date of creation: 1998
Handle: RePEc:fip:fedlwp:1998-006
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  1. Edward P. Lazear, 1995. "Personnel Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121883, September.
  2. Idson, Todd L & Valletta, Robert G, 1996. "Seniority, Sectoral Decline, and Employee Retention: An Analysis of Layoff Unemployment Spells," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 654-676, October.
  3. Lazear, Edward P, 1981. "Agency, Earnings Profiles, Productivity, and Hours Restrictions," American Economic Review, American Economic Association, vol. 71(4), pages 606-620, September.
  4. George A. Akerlof & Lawrence F. Katz, 1988. "Workers' Trust Funds and the Logic of Wage Profiles," NBER Working Papers 2548, National Bureau of Economic Research, Inc.
  5. Haltiwanger, John, 1984. "The Distinguishing Characteristics of Temporary and Permanent Layoffs," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 523-538, October.
  6. George A. Akerlof & Hajime Miyazaki, 1980. "The Implicit Contract Theory of Unemployment meets the Wage Bill Argument," Review of Economic Studies, Oxford University Press, vol. 47(2), pages 321-338.
  7. John C. Ham, 1986. "Testing whether Unemployment Represents Intertemporal Labour Supply Behaviour," Review of Economic Studies, Oxford University Press, vol. 53(4), pages 559-578.
  8. Lazear, Edward P, 1979. "Why Is There Mandatory Retirement?," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1261-1284, December.
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