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Layoffs And Lemons

  • GIBBONS, R.
  • KATZ, L.F.

In this paper we provide theoretical and empirical analyses of an asymmetric-information model of layoffs in which the current employer is better informed about its workers' abilities than prospective employers are. The key feature of the model is that when firms have discretion with respect to whom to lay off, the market infers that laid-off workers are of low ability. Since no such negative inference should be attached to workers displaced in a plant closing, our model predicts that the post- displacement wages of otherwise observationally equivalent workers will be higher for those displaced by plant closings than for those displaced by layoffs. A simple extension of our model predicts that the post- displacement unemployment duration of otherwise observationally equivalent workers will be lower for those displaced by plant closings than for those displaced by layoffs. In our empirical work, we use data from the Displaced Workers Supplements in the January l984 and 1986 Current Population Surveys. For our whole sample, we find that the evidence (with respect to both re-employment wages and post-displacement unemployment duration) is consistent with the idea that laid-off workers are viewed less favorably by the market than are those losing jobs in plant closings. Furthermore, our findings are much stronger for workers laid-off from jobs where employers have discretion over whom to lay off, and much weaker for workers laid-off from jobs where employers have little or no discretion over whom to lay off.

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Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 531.

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Length: 39 pages
Date of creation: 1989
Handle: RePEc:mit:worpap:531
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  1. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 179-221.
  2. Robert Gibbons & Lawrence Katz, 1989. "Layoffs and Lemons," NBER Working Papers 2968, National Bureau of Economic Research, Inc.
  3. Douglas L. Kruse, 1988. "International Trade and the Labor Market Experience of Displaced Workers," ILR Review, Cornell University, ILR School, vol. 41(3), pages 402-417, April.
  4. repec:pri:indrel:dsp01bg257f06q is not listed on IDEAS
  5. Paul Milgrom & Sharon Oster, 1987. "Job Discrimination, Market Forces, and the Invisibility Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 102(3), pages 453-476.
  6. Riordan, Michael H & Staiger, Robert W, 1993. "Sectoral Shocks and Structural Unemployment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 611-29, August.
  7. Bruce C. Greenwald, 1986. "Adverse Selection in the Labour Market," Review of Economic Studies, Oxford University Press, vol. 53(3), pages 325-347.
  8. Michael Waldman, 1983. "Job Assignments, Signalling nad Efficiency," UCLA Economics Working Papers 286, UCLA Department of Economics.
  9. Jovanovic, Boyan, 1979. "Job Matching and the Theory of Turnover," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 972-990, October.
  10. Lawrence F. Katz, 1986. "Layoffs, Recall and the Duration of Unemployment," NBER Working Papers 1825, National Bureau of Economic Research, Inc.
  11. MacDonald, Glenn M, 1982. "A Market Equilibrium Theory of Job Assignment and Sequential Accumulation of Information," American Economic Review, American Economic Association, vol. 72(5), pages 1038-1055, December.
  12. Kletzer, L., 1988. "Returns To Seniority After Permanent Job Loss," Department of Economics Working Papers 129, Department of Economics, Williams College.
  13. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-161, January.
  14. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Social Choice: A Mean Voter Theorem," Econometrica, Econometric Society, vol. 59(1), pages 1-23, January.
  15. Lawrence F. Katz & Bruce D. Meyer, 1990. "Unemployment Insurance, Recall Expectations, and Unemployment Outcomes," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 973-1002.
  16. Fudenberg, Drew & Tirole, Jean, 1991. "Perfect Bayesian equilibrium and sequential equilibrium," Journal of Economic Theory, Elsevier, vol. 53(2), pages 236-260, April.
  17. repec:fth:prinin:249 is not listed on IDEAS
  18. Katharine G. Abraham & James L. Medoff, 1984. "Length of Service and Layoffs in Union and Nonunion Work Groups," ILR Review, Cornell University, ILR School, vol. 38(1), pages 87-97, October.
  19. Michael Podgursky & Paul Swaim, 1987. "Job Displacement and Earnings Loss: Evidence from the Displaced Worker Survey," ILR Review, Cornell University, ILR School, vol. 41(1), pages 17-29, October.
  20. Edward P. Lazear, 1984. "Raids and Offermatching," NBER Working Papers 1419, National Bureau of Economic Research, Inc.
  21. A. D. Roy, 1951. "Some Thoughts On The Distribution Of Earnings," Oxford Economic Papers, Oxford University Press, vol. 3(2), pages 135-146.
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