The Layoff Rat Race
We investigate how discretionary investments in general and specific human capital are affected by the possibility of layoffs. After investments are made, firms may have to lay off workers, and will do so in inverse order of the profit that each worker generates. Greater skill investments, especially in specific human capital contribute more to a firm's bottom line, so that workers who make those investments will be laid off last. We show that, as long as workers' bargaining positions are not too weak, to reduce layoff probabilities, workers invest in specific human capital. Indeed, workers over-invest in skill acquisition from a social perspective whenever their bargaining power is strong enough, even though they only receive a share of any investment. More generally, we characterize how equilibrium skill investments are affected by the distribution of worker abilities within firms, the probability that a firm downsizes, and the distribution of employment opportunities in the economy.
|Date of creation:||May 2007|
|Contact details of provider:|| Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada|
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- Gibbons, Robert & Waldman, Michael, 2003.
"Enriching a Theory of Wage and Promotion Dynamics Inside Firms,"
4324-03, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert Gibbons & Michael Waldman, 2006. "Enriching a Theory of Wage and Promotion Dynamics inside Firms," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 59-108, January.
- Robert Gibbons & Michael Waldman, 2003. "Enriching a Theory of Wage and Promotion Dynamics Inside Firms," NBER Working Papers 9849, National Bureau of Economic Research, Inc.
- Iourii Manovskii & Gueorgui Kambourov, 2004.
"Occupational Specificity of Human Capital,"
2004 Meeting Papers
197, Society for Economic Dynamics.
- Landers, Renee M & Rebitzer, James B & Taylor, Lowell J, 1996. "Rat Race Redux: Adverse Selection in the Determination of Work Hours in Law Firms," American Economic Review, American Economic Association, vol. 86(3), pages 329-348, June.
- Waldman, Michael, 1990.
"Up-or-Out Contracts: A Signaling Perspective,"
Journal of Labor Economics,
University of Chicago Press, vol. 8(2), pages 230-250, April.
- Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1321-1358.
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