Separations Revisited: Do Layoffs or Quits Drive Lower Separation Rates in High-Quality Firms?

A well-known empirical regularity is that high-productivity firms have lower worker separation rates, but it is unclear whether this pattern reflects quits or layoffs. Using matched employer-employee data from Brazil that distinguish the reason for each separation, we show that the productivity-separation gradient is driven primarily by layoffs rather than quits. We then propose and test a mechanism in which downward wage rigidity prevents firms from adjusting wages in response to adverse shocks, causing those shocks to translate into layoffs. High-productivity firms are less exposed because their larger markdowns provide a buffer between productivity and wages. Consistent with this mechanism, we find that firms with higher markdowns have lower layoff rates, and that markets with stronger wage rigidity exhibit both higher layoff rates and a steeper productivity-layoff gradient. These findings suggest that productivity differences across firms shape not only wages, but also workers' exposure to job loss.